Buttercrumbs Bakery expects to sell 1.25 million scones next year for $1.50 each.The variable cost of a scone 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 scone to $1.75, sales will fall by 50,000 scone.All other things equal, operating cash flow will increase or decrease by

Question

Quizplus · Accepted Answer

First, we need to calculate the current operating cash flow:

Revenue = 1.25 million x $1.50 = $1,875,000
Variable Costs = 1.25 million x $0.80 = $1,000,000
Fixed Costs = $150,000 + $200,000 = $350,000
EBIT = $525,000

Taxes = 34% x $525,000 = $178,500

Net Income = $346,500
Depreciation = $200,000

Operating Cash Flow = $546,500

If the price of the scone is increased to $1.75, the new revenue will be:

New Revenue = (1.25 million - 50,000) x $1.75 = $2,062,500

The new variable costs will remain the same, as the cost per unit is still $0.80. The fixed costs and depreciation will also remain the same. The new EBIT will be:

New EBIT = $636,250

Taxes = 34% x $636,250 = $216,075

New Net Income = $420,175
Depreciation = $200,000

New Operating Cash Flow = $620,175

The change in Operating Cash Flow is:

$620,175 - $546,500 = $73,675

However, since the question asks for the increase or decrease in Operating Cash Flow, we need to subtract the new Operating Cash Flow from the current Operating Cash Flow:

$546,500 - $620,175 = -$73,675

The Operating Cash Flow will decrease by $73,675 if the price of a scone is increased to $1.75 and sales fall by 50,000 scones. Therefore, the correct answer is D.

Buttercrumbs Bakery Expects to Sell 1