A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700.The depreciation is $1,100 a year and the tax rate is 34 percent.What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

Question

Quizplus · Accepted Answer

A decrease of $1 in the variable cost per unit increases the contribution margin by $1 per unit. With 1,650 units sold, this increases the operating income by $1,650. After accounting for taxes (34%), the increase in operating cash flow is $1,650 * (1 - 0.34) = $1,089.

A Project Has Projected Values Of: Unit Sales = 1,650