Boulangerie Bouffard expects to sell 1.25 million croissants next year for $1.50 each. Variable cost of a croissant is $0.80. Fixed costs are $150,000, depreciation $200,000 and the tax rate is 34%. If the bakery can increase the price of a croissant to $1.75 sales will fall by 50,000 croissants. All other things equal, operating cash flow will increase or decrease by

Question

Quizplus · Accepted Answer

- With the given information:
    - Total revenue at current price = 1.25 million x $1.50 = $1,875,000
    - Total variable cost = 1.25 million x $0.80 = $1,000,000
    - Contribution margin = Total revenue - Total variable cost = $875,000
    - Total fixed cost = $150,000 + $200,000 = $350,000
    - EBIT = Contribution margin - Total fixed cost = $525,000
    - Taxes = 34% x EBIT = $178,500
    - Net income = EBIT - Taxes = $346,500
    - Operating cash flow = Net income + Depreciation = $546,500
- If the price is increased to $1.75:
    - Total revenue = (1.25 million - 50,000) x $1.75 = $1,837,500
    - Total variable cost = 1.2 million x $0.80 = $960,000
    - Contribution margin = Total revenue - Total variable cost = $877,500
    - Total fixed cost remains the same.
    - EBIT = Contribution margin - Total fixed cost = $527,500
    - Taxes = 34% x EBIT = $179,150
    - Net income = EBIT - Taxes = $348,350
    - Operating cash flow = Net income + Depreciation = $548,350
- Therefore, the operating cash flow will increase by $1,850, if the price is increased to $1.75. The correct choice is D.

Boulangerie Bouffard Expects to Sell 1