CanDo SA is analyzing a proposed project.The company expects to sell 12,000 units, give or take 4%.The expected variable cost per unit is €7 and the expected ﬁxed cost is €36,000.The ﬁxed and
Variable cost estimates are considered accurate within a plus or minus 6% range.The depreciation
Expense is €30,000.The tax rate is 34%.The sale price is estimated at €14 a unit, give or take 5%.
What is the operating cash ﬂow for a sensitivity analysis on the expected case scenario using total
ﬁxed costs of €32,000?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected sales revenue, which is the expected number of units (12,000) multiplied by the expected sale price (€14):

12,000 x €14 = €168,000

Next, we need to calculate the expected variable cost:

12,000 x €7 = €84,000

Then, we need to calculate the expected depreciation expense:

€30,000

Next, we need to calculate the expected fixed cost:

€36,000

Now, we can calculate the operating income:

Expected Sales Revenue - Expected Variable Cost - Expected Fixed Cost - Depreciation Expense

€168,000 - €84,000 - €36,000 - €30,000 = €18,000

Next, we need to calculate the taxes:

Operating Income x Tax Rate

€18,000 x 0.34 = €6,120

Finally, we can calculate the operating cash flow:

Operating Income - Taxes + Depreciation Expense

€18,000 - €6,120 + €30,000 = €41,880

However, we need to perform a sensitivity analysis with total fixed costs of €32,000.

So, we need to adjust the expected fixed cost:

Expected Fixed Cost - Total Fixed Cost Sensitivity = €36,000 - €32,000 = €4,000

Now, we can recalculate the operating income:

Operating Income = Expected Sales Revenue - Expected Variable Cost - Expected Fixed Cost - Depreciation Expense

Operating Income = €168,000 - €84,000 - €4,000 - €30,000

Operating Income = €50,000

Taxes:

Taxes = Operating Income x Tax Rate

Taxes = €50,000 x 0.34

Taxes = €17,000

Operating Cash Flow:

Operating Cash Flow = Operating Income - Taxes + Depreciation Expense

Operating Cash Flow = €50,000 - €17,000 + €30,000

Operating Cash Flow = €63,000

However, we need to consider the accuracy range of the cost estimates (plus or minus 6%), so we need to calculate the minimum and maximum operating cash flows:

Minimum Operating Cash Flow:

Operating Income = Expected Sales Revenue - Maximum Variable Cost - Maximum Fixed Cost - Depreciation Expense

Operating Income = €168,000 - (€7 x 12,720) - (€36,000 x 1.06) - €30,000

Operating Income = €168,000 - €88,440 - €38,160 - €30,000

Operating Income = €11,400

Taxes:

Taxes = Operating Income x Tax Rate

Taxes = €11,400 x 0.34

Taxes = €3,876

Operating Cash Flow:

Operating Cash Flow = Operating Income - Taxes + Depreciation Expense

Operating Cash Flow = €11,400 - €3,876 + €30,000

Operating Cash Flow = €37,524

Maximum Operating Cash Flow:

Operating Income = Expected Sales Revenue - Minimum Variable Cost - Minimum Fixed Cost - Depreciation Expense

Operating Income = €168,000 - (€7 x 11,280) - (€36,000 x 0.94) - €30,000

Operating Income = €168,000 - €78,960 - €33,840 - €30,000

Operating Income = €25,200

Taxes:

Taxes = Operating Income x Tax Rate

Taxes = €25,200 x 0.34

Taxes = €8,568

Operating Cash Flow:

Operating Cash Flow = Operating Income - Taxes + Depreciation Expense

Operating Cash Flow = €25,200 - €8,568 + €30,000

Operating Cash Flow = €46,632

Therefore, the operating cash flow for the sensitivity analysis on the expected case scenario using total fixed costs of €32,000 is €37,524 to €46,632, with an average of €42,078. However, we are only asked for the operating cash flow in the expected case scenario, which is €63,000. Thus, the best choice is A) €14,520.

CanDo SA Is Analyzing a Proposed Project