Newton Industries is considering a project and has developed the following estimates: unit sales = 7,300, price per unit = $149, variable cost per unit = $91, fixed costs = $216,400. The depreciation is $94,700 a year and the tax rate is 35 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?

Question

Quizplus · Accepted Answer

Operating cash flow can be calculated as follows:

Operating cash flow = (unit sales × price per unit − variable cost per unit × unit sales) − fixed costs − depreciation
                      = (7,300 × $149 − 7,300 × $91) − $216,400 − $94,700
                      = $50,970

If the selling price increases by $1, then the new operating cash flow can be calculated as follows:

New operating cash flow = (unit sales × (price per unit + $1) − variable cost per unit × unit sales) − fixed costs − depreciation
                                 = (7,300 × $150 − 7,300 × $91) − $216,400 − $94,700
                                 = $55,715

Therefore, the increase in operating cash flow due to the $1 increase in selling price is:

$55,715 − $50,970 = $4,745

Thus, the answer is A.

Newton Industries Is Considering a Project and Has Developed the Following