Chip’s Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite for...

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 equal only 86 percent of this amount if the price is raised 15 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 a 15 percent price increase on the firm’s FCF for the year?

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Expert Solution

What will be the effect of a 15 percent price increase on the firm’s FCF for the year?

FCF will decrease by = $38000 - 35078.26 = $2921.74

* Total sales if price increased = Total if price not increased * 86% = $300000 * 86% = 258000

New Price = Current Price * 1.15 = 20 * 1.15 = $23

Sales in units = Sales in $ / Selling price = $258000 / 23 = 11217.39 Units

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jeff jeffy answered 1 year ago

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