Question

A project currently generates sales of $11 million, variable costs equal 50% of sales, and fored costs are $2.2 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 $11 million to $12.1 milion? (Input the amount as positive value.Enter your answer in dollars not in millions.) Cash flow b. What are the effects on cash flow, if variable costs increase to 55% of sales? (Input the amount as positive value. Enter your answer in dollars not in millions.) Cash flow < Prev 14 of 30 Sept> e here to search

Answer 1

Calculating the cash flow:

Particular	Amount in millions of $
Sales	11
Less: Variable Cost (50% of Sales)	(5.5)
Gross Profit	5.5
Less: Fixed Cost	(2.2)
Taxable Income	3.3
Less: Tax @ 30%	(0.99)
Net Income	2.31

As all sales and expenses are cash items, cash flow will be $ 2.31 million

a). Sales Increases from $ 11 million to $ 12.1 million and every other thing remain constant

Calculating the cash flow:

Particular	Amount in millions of $
Sales	12.1
Less: Variable Cost (50% of Sales)	(6.05)
Gross Profit	6.05
Less: Fixed Cost	(2.2)
Taxable Income	3.85
Less: Tax @ 30%	(1.155)
Net Income	2.695

Cash flow will be $ 2.695 million.

So, cash flow will increase by $ 0.385 million from increase in sales.

b). Variable cost increased to 55% of sales and every other thing remain constant as original question

Calculating the cash flow:

Particular	Amount in millions of $
Sales	11
Less: Variable Cost (55% of Sales)	(6.05)
Gross Profit	4.95
Less: Fixed Cost	(2.2)
Taxable Income	2.75
Less: Tax @ 30%	(0.825)
Net Income	1.925

Cash flow will be $1.925 million.

So, cash flow will decrease by $0.385 million from increase in Variable cost to 55%.

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Answer 2

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