Jeans 'n' More currently sells blue jeans and T-shirts.Management is considering adding fleece tops to their range to provide a cooler weather option.The tops would sell for $39 each and they expect to sell 6000 per year.By adding the fleece tops,management feels that they will sell an additional 1200 pairs of jeans at $45 a pair and 500 fewer T-shirts at $10 each.The variable cost per unit is $20 on the jeans,$4.50 on the T-shirts,and $22 on the fleece tops.The incremental annual depreciation expense related to the fleece top is $32 000 and the incremental annual fixed costs related to the fleece top are $60 000.The tax rate is 35 per cent.What is the project's operating cash flow?

Question

Quizplus · Accepted Answer

The operating cash flow is calculated by finding the incremental revenue, subtracting the incremental costs, and adjusting for taxes. Incremental revenue from fleece tops is $39 * 6000 = $234,000. Incremental revenue from additional jeans is $45 * 1200 = $54,000. Lost revenue from T-shirts is $10 * 500 = $5,000. Total incremental revenue is $234,000 + $54,000 - $5,000 = $283,000. Incremental variable costs are $22 * 6000 + $20 * 1200 - $4.50 * 500 = $132,000 + $24,000 - $2,250 = $153,750. Incremental fixed costs are $60,000. Depreciation is $32,000. Total costs are $153,750 + $60,000 + $32,000 = $245,750. Operating income before tax is $283,000 - $245,750 = $37,250. After-tax operating income is $37,250 * (1 - 0.35) = $24,212.50. Adding back depreciation gives operating cash flow: $24,212.50 + $32,000 = $56,212.50.

Jeans 'N' More Currently Sells Blue Jeans and T-Shirts