Burke\'s Corner currently sells blue jeans and T-shirts. Management is consideri

Question

Burke's Corner currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory to provide a cooler weather option. The tops would sell for $49 each with expected sales of 3,600 tops annually. By adding the fleece tops, management feels the firm will sell an additional 220 pairs of jeans at $59 a pair and 350 fewer T-shirts at $18 each. The variable cost per unit is $36 on the jeans, $9 on the T-shirts, and $21 on the fleece tops. With the new item, the depreciation expense is $27,000 a year and the fixed costs are $62,000 annually. The tax rate is 34 percent. What is the project's operating cash flow?

Explanation / Answer

Hi,

Please find the answer as follows:

Value dervied from Selling of Fleece Tops

Sales (3600*49) = 176400

Less Variable Cost (3600*21) = 129600

Total Value from Fleece Tops = 100800

Value dervied from Sales of Additonal Jeans

Sales (220*59) = 12980

Less Variable Cost (220*36) = 7920

Total Value from Fleece Tops = 5060

Value Lost from Decline in Sales of T-Shirts

Sales (-350*18) = -6300

Less Variable Cost (-350*9) = -3150

Total Value from Fleece Tops = -3150

Projects Operating Cash Flow = [(100800 + 5060 - 3150) - 62000]*(1-.34) + 27000*.34 = 36048.60 or 36049

Answer is 36048.60 or 36049 (when rounding off to 0 decimal places)

Notes:

a) Fixed Cost will be deducted from the Total Value of Fleece Tops, Jeans T-Shirts Sales.

b) Depreciation will be added back to calculate free cash flow after the adjustment of tax on it.

Thanks.

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