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 $54 each with expected sales of 3,850 tops annually. By adding the fleece tops, management feels the firm will sell an additional 240 pairs of jeans at $64 a pair and 375 fewer T-shirts at $25 each. The variable cost per unit is $32 on the jeans, $16 on the T-shirts, and $28 on the fleece tops. With the new item, the depreciation expense is $34,000 a year and the fixed costs are $69,000 annually. The tax rate is 35 percent. What is the project's operating cash flow?

Answer 1

Answer : The project's Operating Cashflow is $ 34913.

Calculation of Projects Operating Cash Flows

Below is the Table showing the calculation of Operating Cash Flow :

Particulars	Quantity	Price	Workings	Total
Revenue from Sale of Fleece Tops	3850	54	3850 * 54	207900
Revenue from Sale of Additional Jeans	240	64	240 * 64	15360
Revenue Lost of T-shirts from Sale of Fleece Tops	375	25	375 * 25	(9375)
Additional Variable Cost of Fleece Tops	3850	28	3850 * 28	(107800)
Additional Variable Cost of Jeans	240	32	240 * 32	(7680)
Saving in Variable Cost of T-Shirts due to fewer sale	375	16	375 * 16	6000
Depreciation Expense				(34000)
Fixed Expenses				(69000)
Earnings Before Tax				1405
Tax @ 35 %			1405 * 35%	(491.75)
Earnings After Tax				913.25
Depreciation (being Non cash Item)				34000
Project's Operating Cash Flows				34913.25

Therefore Projects Operating Cash Flow is $ 34913.

Note : When calculating Projects Operating Cash Flows we will consider additional revenue/ (Lost Revenue) as well as (additonal cost) /Saving in cost due to addition of one more product i.e Fleece Tops in this case.