Question

Question 7 2 View Policies Current Attempt in Progress Given the soaring price of gasoline, Ford is considering introducing a new production line of gas-electric hybrid sedans. The expected annual unit sales of the hybrid cars is 40,000; the price is $25,000 per car. Variable costs of production are $14,000 per car. The fixed overhead including salary of top executives is $80 million per year. However, the introduction of the hybrid sedan will decrease Ford's sales of regular sedans by 6,000 cars per year; the regular sedans have a unit price of $20,000, a unit variable cost of $12,000, and fixed costs of $250,000 per year. Depreciation costs of the production plant are $52,000 per year. The marginal tax rate is 40 percent. What is the incremental annual cash flow from operations? Incremental annual cash flow from operations $

Answer 1

Selling Price of One Hybrid Car = $ 25,000

Less: Variable Cost of production = $ 14,000

Contribution per car = $ 11,000

Total Contribution from hybrid cars = $ (11,000 X 40,000) = $ 44,00,00,000

Less : Opportunity loss from the loss of sale of normal cars:

Selling Price of One Car = $ 20,000

Cost of One Car = $ 12,000

Contribution per Car = $ 8,000

Total contribution = $ (8000 X 6000) = $ 4,80,00,000

Net (Pre-Tax) Contribution from the Sale of Hybrid Cars = $ (44,00,00,000 - 4,80,00,000) = $ 39,20,00,000

Less : Tax @ 40% = $ ( 40/100 X 39,20,00,000) = $ 15,68,00,000

Net post tax incremental cash flows = $ ( 39,20,00,000 - 15,68,00,000) = $ 23,52,00,000