Effects on Cash Flow with Increase in Sales
What are the effects on cash flow if sales increase from $4 million to $4.4 million?
The effects on cash flow when sales increase from $4 million to $4.4 million would be the difference in cash flow between the new and initial cash flows, which is $1.368 million - $1.2 million = $0.168 million (or $168,000).
Calculating Cash Flow Effects of Sales Increase
Sales: $4 million
Variable costs: 30% of sales
Fixed costs: $0.8 million
Tax rate: 40%
First, let's calculate the initial cash flow:
Revenue: $4 million
Variable costs: 30% of $4 million = $1.2 million
Fixed costs: $0.8 million
Taxable income: $4 million - $1.2 million - $0.8 million = $2 million
Taxes: 40% of $2 million = $0.8 million
Net income: $2 million - $0.8 million = $1.2 million
Cash flow: $1.2 million + Depreciation (assuming it's not given)
To calculate the effects on cash flow when sales increase to $4.4 million:
Additional revenue: $4.4 million - $4 million = $0.4 million
Additional variable costs: 30% of $0.4 million = $0.12 million
New taxable income: ($4 million + $0.4 million) - ($1.2 million + $0.12 million + $0.8 million) = $2.28 million
New taxes: 40% of $2.28 million = $0.912 million
New net income: $2.28 million - $0.912 million = $1.368 million
New cash flow: $1.368 million + Depreciation
Therefore, the effects on cash flow when sales increase from $4 million to $4.4 million would be an increase of $168,000. This means that the firm would have additional cash flow of $168,000 due to the increase in sales.