A project has a contribution margin of $5, projected ﬁxed costs of $12,000, projected variable cost per unit of $12, and a projected ﬁnancial break-even point of 5,000 units. What is the operating
Cash ﬂow at this level of output?
A) $1,000
B) $12,000
C) $13,000
D) $68,000
E) $73,000

Question

Quizplus · Accepted Answer

To calculate the operating cash flow at this level of output, we need to use the formula:

Operating Cash Flow = (Unit Contribution Margin x Number of Units Sold) - Fixed Costs

The unit contribution margin can be calculated as the selling price per unit minus the variable cost per unit.

So, the unit contribution margin = $5 - $12 = -$7 (negative because variable costs are higher than the selling price)

At the break-even point of 5,000 units, the operating cash flow can be calculated as:

Operating Cash Flow = (-$7 x 5,000) - $12,000
= -$35,000 - $12,000
= -$47,000

This means that at the break-even point of 5,000 units, the project is not generating any positive cash flow and is operating at a loss.

Therefore, to increase operating cash flow, we need to sell more than 5,000 units. Let's say we sell 6,000 units.

At 6,000 units, the contribution margin will remain constant at -$7 per unit. However, the total contribution margin will increase as follows:

Total Contribution Margin = Unit Contribution Margin x Number of Units Sold
= -$7 x 6,000
= -$42,000

We can now calculate the operating cash flow as:

Operating Cash Flow = Total Contribution Margin - Fixed Costs
= -$42,000 - $12,000
= -$54,000

This means that at 6,000 units, the project is still operating at a loss and generating negative cash flow.

Therefore, the only way to generate a positive operating cash flow is to sell more than 13,000 units.

At 13,000 units, the calculation will be as follows:

Total Contribution Margin = Unit Contribution Margin x Number of Units Sold
= $5 - $12 x 13,000
= $65,000

Operating Cash Flow = Total Contribution Margin - Fixed Costs
= $65,000 - $12,000
= $53,000

Therefore, the best choice is C, which is $13,000.

A Project Has a Contribution Margin of $5, Projected ﬁXed