Question

Sun Brite has a new pair of sunglasses it is evaluating. The company expects to sell 5,700 pairs of sunglasses at a price of $152 each and a variable cost of $104 each. The equipment necessary for the project will cost $300,000 and will be depreciated on a straight-line basis over the 9-year life of the project. Fixed costs are $180,000 per year and the tax rate is 35 percent. How sensitive is the operating cash flow to a $1 increase in variable costs per pairs of sunglasses?

• −$3,705

• −$3,335

• $3,705

• −$4,117

• $3,335

Answer 1

		In $
Year	1	1
Sale Price	152.00	152.00
Sales Qty	5700	5700
Total sales Value	866400.00	866400.00			Depreciation as Per SLM = Original Cost - Salvage Value/ Useful Life of Asset
Variable costs per unit	104.00	105.00
Variable costs	592800.00	598500
Fixed Costs	180000.00	180000.00			Depreciation	300000-0/9
Depreciation	33333.33	33333.33				33333.33 $	Per annum
EBT	60266.67	54566.67
Taxes(35%)	21093.33	19098.33
EAT	39173.34	35468.34
Depreciation	33333.33	33333.33
Cash Flow	72506.67	68801.67
	A	B
Difference	$3705
Hence with Increase in Variable cost by $1 Per unit The cash Flows decrease By $3705