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

Question

Quizplus · Accepted Answer

First, let's calculate the current operating cash flow:
Revenue = 1.25 million croissants * $1.50 per croissant = $1,875,000
Variable Cost = 1.25 million croissants * $0.80 per croissant = $1,000,000
Fixed Cost = $150,000 + $200,000 = $350,000
Depreciation = $200,000
EBIT = Revenue - Variable Cost - Fixed Cost - Depreciation = $325,000
Taxes = 0.34 * EBIT = $110,500
Operating Cash Flow = EBIT - Taxes = $214,500

Now, let's calculate the operating cash flow if the price increases to $1.75 and 50,000 croissants are not sold:
New Revenue = (1.25 million - 50,000) croissants * $1.75 per croissant = $1,818,750
New Variable Cost = (1.25 million - 50,000) croissants * $0.80 per croissant = $920,000
New Fixed Cost = $350,000
Depreciation = $200,000
New EBIT = New Revenue - New Variable Cost - New Fixed Cost - Depreciation = $348,750
Taxes = 0.34 * New EBIT = $118,395
New Operating Cash Flow = New EBIT - Taxes = $230,355

Therefore, the operating cash flow will increase by $15,855 ($230,355 - $214,500), which is closest to option D.

Boulangerie Bouffard Expects to Sell 1