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

Question

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 19 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? (Round answers to nearest whole dollar, e.g. 5,275.)

Explanation / Answer

Current year
300,000 (15,000 x $20) revenues
- 150,000 (15,000 x $10) variable costs
- 100,000 fixed cost
- 20,000 depreciation
= $30,000 income before taxes
- 9,000 (30,000 x 30%) taxes
= $21,000 operating income
+ 20,000 depreciation
= $41,000 operating cash flow (since there are no capital expenditures, this is also your FCF).

Estimated Year
317,400 [92% x 15,000) x ($20 x 1.15)] revenue
- 138,000 (15,000 x 92% x $10) variable costs
- 100,000 fixed cost
- 20,000 depreciation
= 59,400 income before taxes
- 17,820 (59,400 x 30%) taxes
= $41,580 operating income
+ 20,000 depreciation
= $61,580 operating cash flow
- 3,000 working capital
= $58,580 FCF

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