Tarco Toys is considering a new product, a gumball bank. Tarco's market research firm is recommending that they sell the bank for $45 and predicts at that price they will sell 65,000 units per year. Variable cost per unit is $25 and annual fixed costs are $200,000. The up front investment in equipment for the five year project is $750,000. Tarco's tax rate is 21%. You can direct the market research firm to either do further research to improve the accuracy of their pricing recommendation or the unit forecast. You therefore want to understand which variable will have more effect on your operating cash flow forecast.

Calculate annual operating cash flow (OCF) assuming the recommended variables?

Calculate the sensitivity of OCF to a 10% increase in selling price and then, instead, to a 10% higher unit forecast. Based on those calculations, which variable is a more important driver of operating cash flow, in other words, is OCF more sensitive to price or units sold?

Answer rating: 100% (QA)

Calculate the annual operating cash flow OCF using the recommended variables OCF Sales Variable costs Fixed costs Taxes Given the information provided ... View the full answer