Question

All depreciation charges are fixed. Old manufacturing equipment with an annual depreciation charge of $40,000 will be fully depreciated by the end of year 1 and will not be replaced with new equipment because it is still operating to specification. Sales volume is expected to decrease by 2 percent. Sales price is expected to increase by 8 percent. On a per-unit basis, expectations are that materials costs will decrease by 5 percent and variable manufacturing cash costs will increase by 4 percent. Fixed cash manufacturing costs are expected to increase by 12 percent. Variable marketing costs will change with volume. Administrative cash costs are expected to decrease by 15 percent. Inventories are kept at zero. Fairmount Industries operates on a cash basis. No change is expected in marketing or administrative depreciation. Required: Estimate the cash from operations expected in year 2.

a. $101,260
b. $115,260
c. $89,260
d. $75,260

Answer 1

Without specific financial data from the previous year, it is not possible to accurately calculate the expected cash from operations for year 2 based on the changes described in the question.

Step-by-step explanation:

The presented scenario does not provide enough specific financial data to accurately calculate the expected cash from operations for year 2. To estimate the cash from operations, you would need to start with the cash flows from the preceding year and then adjust for the changes expected in year 2 per the question's details. This would include accounting for the decreased sales volume, increased sales price, decreasing material costs, increasing variable manufacturing cash costs, increasing fixed cash manufacturing costs, decreasing administrative cash costs, while considering the impact of depreciation and inventory levels. Such a calculation would require access to the actual numbers for sales, costs, and other relevant financial data from the previous year, which are not provided.