You are analyzing a project and have developed the following estimates: unit sales = 2,150, price per unit = $84, variable cost per unit = $57, fixed costs per year = $13,900. The depreciation is $8,300 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?

The answer is: an increase of $1,397.50

Explanation:

First we have to calculate the net income for the original sale price per unit of $84 and then subtract the depreciation expenses and taxes to calculate the operating cash flow:

total revenue (2,150 x $84) $180,600

cost of goods sold (2,150 x $57) ($122,550)

SG&A, operating expenses ($13,900)

net income $44,150

depreciation expense ($8,300)

EBIT $35,850

taxes (35%) ($12,547.50)

operating cash flow $23,302.50

Then we calculate the new net income for the second sale price per unit of $85 and then subtract the depreciation expenses and taxes to calculate the new operating cash flow:

total revenue (2,150 x $85) $182,750

cost of goods sold (2,150 x $57) ($122,550)

SG&A, operating expenses ($13,900)

net income $46,300

depreciation expense ($8,300)

EBIT B $38,000

taxes (35%) ($13,300)

operating cash flow B $24,700

An increase of $1 in the selling price will result in an increase of $1,397.50 on the operating cash flow.