Chip%u2019s Home Brew Whiskey management forecasts that if the firm sells each b

Question

Chip%u2019s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 82 percent as high if the price is raised 12 percent. Chip%u2019s variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortization charges are $20,000, and the firm has a 30 percent marginal tax rate. Management anticipates an increased working capital need of $3,000 for the year. What will be the effect of the price increase on the firm%u2019s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)

At $20 per bottle the Chip%u2019s FCF is $ and at the new price Chip%u2019s FCF is $.

At $20 per bottle the Chip%u2019s FCF is $ and at the new price Chip%u2019s FCF is $.

Explanation / Answer

at $20 FCF=(300000-150000-100000-20000-30000)*(1-0.30)=18900

At new price=(275520-123000-100000-20000-3000)*(1-0.30)=20664

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