Stellar Plastics is analyzing a proposed project with annual depreciation of $19

ID: 2709416 • Letter: S

Question

Stellar Plastics is analyzing a proposed project with annual depreciation of $19,500 and a tax rate of 34 percent. The company expects to sell 12,000 units, plus or minus 5 percent. The expected variable cost per unit is $3.20plus or minus 4 percent, and the expected fixed costs are $30,000plus of minus 2 percent. The sales price is estimated at $7.50 a unit, plus or minus 4 percent. What is the operating cash flow for a sensitivity analysis using total fixed costs of $31,000?

A.) $19,580

B.)$20,226

C.) $27,210

D.) $21,237

E.) $37,540

Explanation / Answer

Depreciation = 19500

Tax rate = 34%

Sales = 12000 +/- 5%

Sales Price = 7.50 per unit +/- 4%

Variable cost = 3.20 per unit + / - 4%

Fixed costs = 30000 + / - 2%

Given Fixed costs are $ 31000 ===> variance = (31000-30000)/30000 * 100 = 3.33% or 1.33% above the maximum variance limit.

Sales in Units = 12000 * 1.05 * 1.01333 = 12767.958 or 12768 units

Sales Price = 7.5 * 1.04 * 1.013333 = 7.9039974 or $7.90

Variable cost = 3.2 * 1.04 * 1.013333 = 3.37237 or 3.37

Sales

12768 * 7.90

100867

Variable cost

12768 * 3.37

43058

Fixed Cost

31000

Deprecition

19500

EBT

7309

Tax

34%

2485

Net Income

4824

Operating cash flow

4824+19500

24324

The answers provided are not being arrived at by using any of the variations. This is the possible solution.