Question

A project currently generates sales of $9million, variable costs equal 40% of sales, and fixed costs are $1.8 million. The firm’s tax rate is 30%. Assume all sales and expenses are cash items.

a. What are the effects on cash flow if sales increase from $9million to $9.9m? (Input the amount as positive value. Enter answer in dollars not millions)

b. What are the effects on cash flow if variable costs increase to 55% of sales? (Input amount as a positive value. Enter your answer in dollars not in millions)

Answer 1

	INCOME STATEMENT
	Particulars	AMOUNT
	Sales	$            90,00,000
	Less: Varaiable Expenses ($40% of $ 9 Million)	$            36,00,000
	Gross Revenue	$            54,00,000
	Less: Fixed Costs	$            18,00,000
	Net income before tax	$            36,00,000
	Tax @ 30%	$            10,80,000
	Net Income After Tax	$            25,20,000
	ANSWER = A)
	INCOME STATEMENT IF SALES INCREASE FROM $9 MILLION TO $ 9.9 MILLION
	Particulars	AMOUNT
	Sales	$            99,00,000
	Less: Varaiable Expenses ($40% of $ 9.9 Million)	$            39,60,000
	Gross Revenue	$            59,40,000
	Less: Fixed Costs	$            18,00,000
	Net income before tax	$            41,40,000
	Tax @ 30%	$            12,42,000
	Net Income After Tax	$            28,98,000
	When Sales increase from $ 9 Million to $ 9.9 Millon
	than Cash flow will increase by $ 378,000
	ANSWER = B)
	INCOME STATEMENT IF SALES INCREASE FROM $9 MILLION TO $ 9.9 MILLION
	Particulars	AMOUNT
	Sales	$            90,00,000
	Less: Varaiable Expenses ($55% of $ 9 Million)	$            49,50,000
	Gross Revenue	$            40,50,000
	Less: Fixed Costs	$            18,00,000
	Net income before tax	$            22,50,000
	Tax @ 30%	$              6,75,000
	Net Income After Tax	$            15,75,000
	When Variable expenses are increase from 40% to 55% than
	than Cash flow will decrease by by $ 945,000