Asked by Jonathan Celestin on Jun 09, 2024
Verified
Given the following information, calculate OCF at the accounting break-even point. Price = $30; variable cost = $10; fixed cost = $25,000; depreciation = $5,000; tax rate = 34%.
A) $1,750
B) $5,000
C) $15,000
D) $25,000
E) $35,000
Accounting Break-Even
The point at which total revenues equal total expenses, and the company generates neither profit nor loss from operations.
Depreciation Expense
The portion of the cost of a fixed asset that is considered as an expense due to its use, wear and tear, or obsolescence over its useful life.
Tax Rate
The metric used to figure out the tax obligation of individuals and corporate entities.
- Comprehend and determine the operating cash flow for varying output levels within a project.
- Comprehend the principle of depreciation and its effects on cash flow and tax obligations.
Verified Answer
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Final Answer :
B
Explanation :
At the accounting break-even point, a company's total revenue equals its total expenses (excluding interest and taxes). To calculate the Operating Cash Flow (OCF) at this point, we use the formula: OCF = (Sales - Variable Costs - Fixed Costs + Depreciation) * (1 - Tax Rate) + Depreciation. At the break-even point, Sales = Variable Costs + Fixed Costs. Substituting the given values: OCF = ($25,000 + $5,000) * (1 - 0.34) + $5,000 = $5,000.
Learning Objectives
- Comprehend and determine the operating cash flow for varying output levels within a project.
- Comprehend the principle of depreciation and its effects on cash flow and tax obligations.