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 92 percent as high if the price is raised 15 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 $. 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 92 percent as high if the price is raised 15 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.)

Explanation / Answer

Sales=150000*20=300000

Variable cost=150000

Fixed cost=100000

Dep=20000

EBIT=30,000

FCF=EBIT(1-tax rate)+Dep-Change in Working Capital= $38,000

Sales=23*13800=317400

Variable cost=138000

Fixed cost=100000

Dep=20000

EBIT=59400

FCF= $58580

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