. The Picture Gallery has compiled the following estimates. The gallery feels it

Question

. The Picture Gallery has compiled the following estimates. The gallery feels it can sell 240 paintings a year, plus or minus 4 percent. The selling price is $1,100, plus or minus 2 percent. The annual fixed costs are $57,000 and the variable costs are $780 per painting. The costs are accurate within a plus or minus 3 percent range. The tax rate is 33 percent and the annual depreciation expense is $2,100. What is the operating cash flow under the best case scenario? a. $20,415.80 b. $21,311.09 c. $22,655.27 d. $24,755.27

Explanation / Answer

In the best case scenario,

Number of units sold - Maximum

so Number of units sold = 240 * (1+4%) = 249.6 units

Sales Price - Maximum

Sales Price = 1100 *(1+2%) = 1122

Fixed Costs - Minimum

Fixed Costs = 57000 * (1-3%) = 55290

Variable Costs - Minimum

Variable Costs = 780 * (1-3%) = 757

So lets calculate operating cash flow as follows

OCF = (Sales - Fixed Costs - Variable Costs ) * (1-Tax) + Dep * Tax

OCF = (249.6 * 1122 - 55290 - 756.6 * 249.6) * (1-33%) + 2100 * 33%

OCF = 24755.24

So option D

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