Question

Burke's Corner currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $56 each with expected sales of 4,150 tops annually. By adding the fleece tops, management feels the firm will sell an additional 270 pairs of jeans at $68 a pair and 405 fewer T-shirts at $29 each. The variable cost per unit is $38 on the jeans, $19 on the T-shirts, and $34 on the fleece tops. With the new item, the depreciation expense is $36,000 a year and the fixed costs are $74,500 annually. The tax rate is 35 percent. What is the project's operating cash flow?

$26,153

$19,898

$31,418

$20,888

$15,623

Answer 1

			Jeans	T-Shirts	Fleece Tops	Total
Expected sales change			270	-405	4150
Selling price			68	29	56
Less: VC per unit			38	19	34
CM per unit			30	10	22
Total Contribution			8100	-4050	91300	95350
Less: Fixed cost						74500
Less: Dep						36000
Net Income before tax						-15150
Tax shield @ 35%						5302.5
Net Income after tax						-9847.5
Add: Dep						36000
Annual cashflows						26152.5
Answer is $ 26153