Rolston Music Company is considering the sale of a new sound board used in recording studios

The annual OCF of the project is $10,782,738.

Since the new project will decrease sales of the existing model, the total contribution from the new model will be the contribution from the new model less the contribution from the existing model.

Calculating total contribution from the new model:

• Number of units sold of the new model = 1,540
• Selling price per unit = $26,000
• Variable cost per unit = 53% of $26,900 = $14,257
• Total contribution from new model = 1,540 * ($26,000 - $14,257) = $18,084,220

Calculating the lost contribution from the existing model:

• Lost sales of the existing model per year = 2,040 - 1,860 = 180
• Selling price per unit = $22,800
• Variable cost per unit = 53% of $22,800 = $12,084
• Lost contribution from the existing model = 180 * ($22,800 - $12,804) = $1,928,880

Net contribution from project = $18,084,220 - $1,928,880 = $16,155,340

• Fixed cost = $1,390,000
• Gross profit = net contribution - fixed cost = $14,765,340
• Depreciation expense per year = $1,490,000
• EBIT = Gross profit - Depreciation = $13,275,340
• Interest = $0
• EBT = EBIT - Interest = $13,275,340
• Taxes (30%) = $3,982,602
• Net income = $9,292,738

Depreciation is a non cash expense, so operating cash flow (OCF) = net income + depreciation = $10,782,738.