can someone show me step by step on how they reached the answer so I can better
ID: 2759017 • Letter: C
Question
can someone show me step by step on how they reached the answer so I can better understand what's going on. Please and thanks in advance!
Consider a three-year project with the following information: initial fixed asset investment $880,000; straight-line depreciation to zero over the five-year life; zero salvage value; price $34.45; variable costs -$22.75; fixed costs = $212,000; quantity sold 98,000 units, tax rate-34 percent. Required: How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.9,32.16),) answer to 2 decimal places (e.g., 32.16).)Explanation / Answer
Initial Fixed Investment = $880,000
Life of Project = 5 year
Salvage value = 0
Annual depreciation = $880,000 / 5
= $176,000
Annual depreciation is $176,000, which is a part of fixed cost.
Total Fixed cost = $212,000
Variable cost per unit =$22.75
Price per unit = $34.45
Number of unit produced = 98,000
First of all calculate Total revenue from selling 98,000 unit product.
Total revenue = 98,000 × $34.45
= $3,376,100
Now calculated total cost for producing 98,000 unit of product.
Total cost = Total fixed cost + (Variable cost × Number of unit produced)
= $212,000 + ($22.75 × 98,000)
= $212,000 + $2,229,500
= $2,441,500
Operating income = $3,376,100 - $2,441,500
= $934,600
Tax rate = 34%
Net income (Profit after tax) is calculated below
Net Income = $934,600 × (1 – 34%)
= $616,836
Operating Cash flow = Net profit + Depreciation
= $616,836 + $176,000
= $792,836
Net operating Cash flow when company produces 98,000 unit is $792,836.
Now if company produces 100,000 unit then net operating cash flow is calculated below:
First of all calculate Total revenue from selling 100,000 unit product.
Total revenue = 100,000 × $34.45
= $3,445,000
Now calculated total cost for producing 100,000 unit of product.
Total cost = Total fixed cost + (Variable cost × Number of unit produced)
= $212,000 + ($22.75 × 100,000)
= $212,000 + $2,275,000
= $2,487,000
Operating income = $3,445,000 - $2,487,000
= $958,000
Tax rate = 34%
Net income (Profit after tax) is calculated below
Net Income = $958,000 × (1 – 34%)
= $632,280
Operating Cash flow = Net profit + Depreciation
= $632,280 + $176,000
= $808,280
Net operating Cash flow when company produces 100,000 unit is $808,280.
Change in operating cash flow with change in 2000 unit of product
= $808,280 - $792,836
= $15,444
So change in NCF with change in Unit Product produce
= $15,444 / 2,000
= $7.722
So change in OCF with respect to change in unit produce is 7.722.
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