Chip Chip\'s Home Brew Whiskey management forecasts that if the firm sells each
ID: 2702972 • Letter: C
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 84 percent as high if the price is raised 8 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
for option 1
selling price = 20
demand = 15000
revenue = 300000
variable cost = 150000
fixed cost = 100000
deprication =20000
Earnings before tax = 30000
tax = -9000
net income = 21000
add depriciation = 20000
net cash flow = 41000
less working capital = -3000
cash flow = 38000............ans1
for option 2
selling price = 21.6
demand = 12600
revenue = 272160
variable cost = 126000
fixed cost = 100000
deprication =20000
Earnings before tax = 26160
tax = -7848
net income = 18312
add depriciation = 20000
net cash flow = 38312
less working capital = -3000
cash flow = 35312.....ans 2