Chip Chip Chip\'s Home Brew Whiskey management forecasts that if the firm sells

Question

Chip Chip Chip's 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 93 percent as high if the price is raised 14 percent. Chip's 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's FCF for the year?

Explanation / Answer

Price Demand Contribution Margin Operating Profit Depreciation Fixed Cost Profit before tax Tax Profit after tax Add Depn Sub: working capital FCF Current $                      20.00 15000 $                                   10.00 $       150,000.00 $                20,000.00 $         100,000.00 $             30,000.00 $   9,000.00 $       21,000.00 $ 20,000.00 0 $ 41,000.00 If Raised $                      22.80 13950 $                                   12.80 $       178,560.00 $                20,000.00 $         100,000.00 $             58,560.00 $ 17,568.00 $       40,992.00 $ 20,000.00 $                    -3,000.00 $ 57,992.00 Variable Cost $                     10.00 Tax rate 30% Fixed Cost $          100,000.00 Working capital need $            3,000.00 Depreciation $             20,000.00

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