Question

1. The Master's Boulangerie produces and sells 3,600 croissants per day, everyday of the year, give or take 10%. Wholesale price per croissant is $3.25. Variable costs range from $1.25-$1.75, with the most likely price being $1.50. Fixed costs are estimated to be 20% of sales, but could be as low as 18% or as high as 21%. The Boulangerie original investment in PP&E was $25,000, and is being depreciated using the straight line method over 5 years. The marginal tax rate is 36%. What is the yearly operating cash flow under the worst and best case scenario?

Answer 1

Annual Depreciation = Original Investment / No. of years of working life

= $25,000 / 5 = $5,000

Worst Case:

Quantity Sold = 3,600 x 365 x (1 - 0.10) = 1,182,600 croissants

Sales = $3.25 x 1,182,600 = $3,843,450

Variable Costs = $1.75 x 1,182,600 = $2,069,550

Fixed Costs = 0.21 x $3,843,450 = $807,124.50

Operationg CFs = [(Sales - Variable Costs - Fixed Costs) x (1 - t)] + [Depreciation x Tax Rate]

= [($3,843,450 - $2,069,550 - $807,124.50) x (1 - 0.36)] + [$5,000 x 0.36]

= $618,736.32 + $1,800 = $620,536.32

Best Case:

Quantity Sold = 3,600 x 365 x (1 + 0.10) = 1,445,400 croissants

Sales = $3.25 x 1,445,400 = $4,697,550

Variable Costs = $1.25 x 1,445,400 = $1,806,750

Fixed Costs = 0.18 x $4,697,550 = $845,559

Operationg CFs = [(Sales - Variable Costs - Fixed Costs) x (1 - t)] + [Depreciation x Tax Rate]

= [($4,697,550 - $1,806,750 - $845,559) x (1 - 0.36)] + [$5,000 x 0.36]

= $1,308,954.24 + $1,800 = $1,310,754.24