Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle

Question

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 90 percent as high if the price is raised 10 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.) At $20 per bottle the Chip’s FCF is $ and at the new price Chip’s FCF is $ .

Explanation / Answer

A)

At $20 per bottle the Chip’s FCF is $21,000

B)

At the new price Chip’s FCF is $29,400

Net Income at $20 Bottles                     15,000 SP $20 VC 10 CM $10                 $1,50,000 Fixed cost               ($1,00,000) Dep                  (20,000)                     $30,000 Less Tax ($9000)                     $21,000

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