Question

Stellar Plastics is analyzing a proposed project. The company expects to sell 11,000 units, give or take 3 percent. The expected variable cost per unit is $8.00 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 4 percent range. The depreciation expense is $31,000. The tax rate is 34 percent. The sale price is estimated at $16.00 a unit, give or take 4 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000?

Answer 1

Operating cash flow for a sensitivity analysis using total fixed costs of $32,000

Sales units = 11,000 units

Selling Price per unit = $16.00 per unit

Variable cost per unit = $8.00 per unit

Fixed Costs = $32,000

Depreciation Expense = $31,000 per year

Annual Operating Cash Flow = [(Sales – Variable Costs – Fixed Costs) x (1 – Tax Rate)] + [Depreciation x Tax Rate]

= [{(11,000 units x $16.00) – (11,000 units x $8.00) - $32,000} x (1 – 0.34)] + [$31,000 x 0.34]

= [($176,000 - $88,000 - $32,000) x (1 – 0.34)] + [$31,000 x 0.34]

= [$56,000 x 0.66] + [$31,000 x 0.34]

= $36,960 + $10,540

= $47,500

“Therefore, the operating cash flow for a sensitivity analysis using total fixed costs of $32,000 would be $47,500”