Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?
A) Storing supplies in the same space currently used for materials storage
B) Utilizing the basket manager to oversee wreath production
C) Hiring additional employees to handle the increased workload should the firm accept the wreath project
D) Researching the market to determine if wreath sales might be profitable before deciding to proceed
E) Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

Question

Quizplus · Accepted Answer

The incremental operating cash flow related to the wreath project would be any cash flows that are directly related to the project and differ from the cash flows without the project. In this case, hiring additional employees to handle the increased workload for the wreath project is a cash outflow that is specific to the project and thus represents an incremental operating cash flow. Storing supplies in the same space currently used for materials storage is a sunk cost that does not change with the acceptance of the wreath project and thus is not incremental. Utilizing the basket manager to oversee wreath production is also not incremental since the manager would still be employed regardless of whether the firm makes baskets or wreaths. Researching the market and assuming lower interest expense are not cash flows and thus are not examples of incremental operating cash flows.

Kelley's Baskets Makes Handmade Baskets and Is Currently Considering Making