Chip’s Home Brew Whiskey management forecasts that - 94939

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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 86 percent as high if the price is raised 12 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 $_____________________ at the new price Chip’s FCF is $_______________________
Solution Description

(a) For the Current price …

Revenue = 15000 x $20 = $300000

Variable costs = 15,000 x $10 = $150000

Fixed cost = $100000