Rolston Music Company is considering the sale of a new sound board used in recor
ID: 2729321 • Letter: R
Question
Rolston Music Company is considering the sale of a new sound board used in recording studios. The new board would sell for $26,600, and the company expects to sell 1,510 per year. The company currently sells 2,010 units of its existing model per year. If the new model is introduced, sales of the existing model will fall to 1,830 units per year. The old board retails for $22,500. Variable costs are 56 percent of sales, depreciation on the equipment to produce the new board will be $1,460,000 per year, and fixed costs are $1,360,000 per year. Required: If the tax rate is 40 percent, what is the annual OCF for the project? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount (e.g., 1,234,567).) I have posted this questions several times and it is not answering correct
Explanation / Answer
Calculation of Annual Operating Cash Flows (OCF) for the project:
Annual $
Additional contribution on new model:
Unit sales = 1510
Contribution Per unit = 26600 *(1-56%) = $11704 per unit
Additional contribution on new model = 1510 units * $11704 =
$ 17,673,040
Less: Loss of Contribution on existing model:
Reduction in unit sales (2010- 1830) = 180 units
Contribution Per unit = 22500 *(1-56%) = $9900 per unit
Loss of Contribution on existing model = (180 units * $9900)
$ (1,782,000)
Net incremental annual contribution
$ 15,891,040
Less: Annual deprecation of new equipment
$ (1,460,000)
Less: Annual Fixed costs
$ (1,360,000)
Net incremental annual income before tax
$ 13,071,040
Less: Tax @ 40%
$ (5,228,416)
Net incremental annual income after tax
$ 7,842,624
Add: Annual deprecation of new equipment
$ 1,460,000
Annual Operating Cash Flows (OCF) for the project
$ 9,302,624
Calculation of Annual Operating Cash Flows (OCF) for the project:
Annual $
Additional contribution on new model:
Unit sales = 1510
Contribution Per unit = 26600 *(1-56%) = $11704 per unit
Additional contribution on new model = 1510 units * $11704 =
$ 17,673,040
Less: Loss of Contribution on existing model:
Reduction in unit sales (2010- 1830) = 180 units
Contribution Per unit = 22500 *(1-56%) = $9900 per unit
Loss of Contribution on existing model = (180 units * $9900)
$ (1,782,000)
Net incremental annual contribution
$ 15,891,040
Less: Annual deprecation of new equipment
$ (1,460,000)
Less: Annual Fixed costs
$ (1,360,000)
Net incremental annual income before tax
$ 13,071,040
Less: Tax @ 40%
$ (5,228,416)
Net incremental annual income after tax
$ 7,842,624
Add: Annual deprecation of new equipment
$ 1,460,000
Annual Operating Cash Flows (OCF) for the project
$ 9,302,624
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