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 91 percent as high if the price is raised 11 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 $.

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 91 percent as high if the price is raised 11 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 $.

Answer 1

To calculate the effect of the price increase on the firm's Free Cash Flow (FCF) for the year, we need to calculate the FCF at $20 per bottle and the FCF at the new price.

Let's break down the calculation step by step:

1. Calculate the revenue at $20 per bottle:
Revenue per bottle = $20
Quantity sold = 15,000 bottles
Total revenue = Revenue per bottle * Quantity sold

2. Calculate the revenue at the new price:
Price increase = 11%
New price per bottle = $20 + ($20 * 11%)
Quantity sold at the new price = 91% of 15,000 bottles
Total revenue at the new price = New price per bottle * Quantity sold at the new price

3. Calculate the total variable cost:
Variable cost per bottle = $10
Total variable cost = Variable cost per bottle * Quantity sold

4. Calculate the total fixed cash cost:
Fixed cash cost = $100,000

5. Calculate the depreciation and amortization charges:
Depreciation and amortization charges = $20,000

6. Calculate the increased working capital need:
Increased working capital need = $3,000

7. Calculate the tax rate:
Tax rate = 30%

Now, let's put it all together:

FCF at $20 per bottle = (Total revenue - Total variable cost - Total fixed cash cost - Depreciation and amortization charges - Increased working capital need) * (1 - Tax rate)

FCF at the new price = (Total revenue at the new price - Total variable cost - Total fixed cash cost - Depreciation and amortization charges - Increased working capital need) * (1 - Tax rate)

Finally, round the answers to the nearest whole dollar.

So, you can calculate the FCF in both cases using the above formulas.