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 91 percent as high if the price is raised 14 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?

Explanation / Answer

when demand is 15000

sales-vc-fc=15000*20-15000*10-100000=50000

EBIT=50000-30%=35000

FCF=EBIT(1-TAX)+DEP-CHANGE IN WORKING CAPITAL

=35000+20000-3000=52000

WHEN SALES INCREASED BY 90%

SALES=15000+90%=28500

S.P=20+18%=23.60

SALES-VC-FC=28500*23.60-28500*10-100000=287600

FCF=287600-30%+20000-3000=218320

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