A project currently generates sales of $10.4 million, variable costs equal to 50

Question

A project currently generates sales of $10.4 million, variable costs equal to 50% of sales, and fixed costs of $2.2 million. The firm’s tax rate is 30%.

What are the effects on the after-tax profits and cash flow, if sales increase from $10.4 million to $11.8 million. (Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.)

What are the effects on the after-tax profits and cash flow, if variable costs increase to 60% of sales.(Input all amounts as positive values. Do not round intermediate calculations. Enter your answers in millions rounded to 3 decimal places.)

A project currently generates sales of $10.4 million, variable costs equal to 50% of sales, and fixed costs of $2.2 million. The firm’s tax rate is 30%.

Explanation / Answer

a

When the sales is increase to 11.8 MM after tax profit increased to $2,590,000 and cash flow increased to $3,700,000.

b

When varaible cost increased to 60% the after tax profit decreased to 1,372,000 and cash flow decreased to $1,960,000

Original If the sales increase to 11.8 m When vaiable cost increase to 60% Current Sales            10,400,000          11,800,000        10,400,000 varaible cost = 50% of sales              5,200,000            5,900,000          6,240,000 Fixed cost              2,200,000            2,200,000          2,200,000 Profit = sales - variable cost - fixed cost              3,000,000            3,700,000          1,960,000 Tax rate 30% 30% 30% After tax profit              2,100,000            2,590,000          1,372,000

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