The Creamery is analyzing a project with expected sales of3,800 units, give or t
ID: 2710711 • Letter: T
Question
The Creamery is analyzing a project with expected sales of3,800 units, give or take 5 percent. The expected variable cost per unit is $185 and the expected fixed costs are $364,000. Cost estimates are considered accurate within a plus or minus 2 percent range. The depreciation expense is $104,000. The sales price is estimated at $305 per unit, give or take 4 percent. The tax rate is 35 percent. The company is conducting a sensitivity analysis with fixed costs of $360,000. What is the OCF given this analysis?
A. $92,600
B. $85,350
C. $98,800
D. $74,874
E. $114,300
Explanation / Answer
Operating Cash Flow [OCF] = $98,800
Operating Cash Flow [OCF] = [ {(Selling price – Variable cost) x Number of units}- Fixed Cost ] (1-Tax Rate) + [ Depreciation x Tax Rate]
= [ ($305 – 185) x 3,800 Units} – 360,000 ] ( 1 – 0.35)] + [$104,000 x 0.35]
= [$96,000 x 0.65 ] + [ $104,000 x 0.35 ]
= $62,400 + 36400
= $98,800
Hence, The Answer is “C. $98,800”
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