Consider a four-year project with the following information: initial fixed asset investment = $555,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $37; variable costs = $25; fixed costs = $230,000; quantity sold = 79,000 units; tax rate = 24 percent. How sensitive is OCF to changes in quantity sold? (Do not round intermediate calculations and round your answer to 2 decimal places, e. g., 32.16.)

for every 1% increase in the quantity sold, OCF increases by 1.24%

for every 1% decrease in the quantity sold, OCF decreases by 1.24%

Explanation:

Consider a four-year project with the following information: initial fixed asset investment = $555,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $37; variable costs = $25; fixed costs = $230,000; quantity sold = 79,000 units; tax rate = 24 percent. How sensitive is OCF to changes in quantity sold?

initial outlay = $555,000

depreciation expense per year = $555,000 / 4 = $138,750

contribution margin per unit = $37 - $25 = $12

quantity sold = 79,000 units

tax rate = 24%

fixed costs = $230,000

OCF = {[(79,000 x $12) - $230,000 - $138,750] x (1 - 24%)} + $138,750 = $578,980

if sales increase by 10%, OCF = {[(86,900 x $12) - $230,000 - $138,750] x (1 - 24%)} + $138,750 = $651,028 ⇒ 12.44% increase

if sales decrease by 10%, OCF = {[(71,100 x $12) - $230,000 - $138,750] x (1 - 24%)} + $138,750 = $506,932 ⇒ 12.44% decrease

whole quiz

1. the sum of all activities involved in getting high-quality products into the marketplace

2.operations

3. the principle of looking at the supply chain as a whole in order to improve the overall flow through the system.

4. produced; performed

5. activities producing tangible products, such as radios, newspapers, buses, and textbooks.

6. activities producing intangible and tangible products, such as entertainment, transportation, and education.

7.   customer focus

8. analyzing a competitor's products to identify desirable improvements

9. the systematic direction and control of the processes that transform resources into finished projects that create value for and provide benefits to consumers.

10. operation management.

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