You are analyzing a project and have developed the following estimates: unit sales = 2,600, price per unit = $56, variable cost per unit = $39, fixed costs = $24,700. The depreciation is $15,800 a year and the tax rate is 33 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 2,600 units sold, this increases the operating cash flow by $2,600. After accounting for taxes (33%), the net increase in operating cash flow is $2,600 * (1 - 0.33) = $1,742.

You Are Analyzing a Project and Have Developed the Following