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

Question

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 11 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 $.

Explanation / Answer

Hi,

Please find the answers as follows

Part 1: $20 per Bottle

FCF = 15000*(20 - 10) - 100000 - 20000 = 30000*(1-.30) + 20000 - 3000 = 38000

Part 2: When Demand goes to 92%

FC = 15000*.92*(20*(1+.11) -10) - 100000 - 20000 = 48360*(1-.30) + 20000 - 3000 = 50852

Thanks.

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