Go Fly A Kite is considering making and selling custom kites in two sizes. The small kites would be priced at $10.70 and the large kites would be $23.70. The variable cost per unit is $5.15 and $11.30, respectively. Jill, the owner, feels that she can sell 2,700 of the small kites and 1,730 of the large kites each year. The fixed costs would be $2,120 a year and the depreciation expense is $1,000. The tax rate is 40 percent. What is the annual operating cash flow?

Operating cash flow = $20,990

Explanation:

                                             Go Fly A Kite

                                    Operating Cash Flow

                                        small kites          large kites         Total  

Sales Volume                     2,700                  1,730             4,430

Sales per unit                    $10.70                $23.70             -

Sales Revenue               $28,890              $41,001           $69,891

Less: Variable expense $(13,905)            $(19,549)        $(33,454)  

Contribution Margin        $14,985              $21,452         $36,437

Less: Fixed expense                                                         $(2,120)

Net operating income                                                       $34,317

Therefore, operating cash flow = net operating income after tax + depreciation

operating cash flow = $34,317 × (1 - 0.40) + ($1,000 × 0.40)

Hence, operating cash flow = $20,590 + 400 = $20,990

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