Chips Home Brew Whiskey management forecasts that if the firm sells each bottle of Snake-Bite

QUESTION

Chips 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. Chips 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 firms FCF for the year?
Solution: Chips Home Brew Whiskey Management Current demand Demand when price raised by 10% Additional Demand (bottles) 15,000 15000*90% = 13,500 (1,500) Selling price per unit $20 $20*1.1 = $22 $2 Total sales $300,000 $297,000 ($3,000) less: variable cost @$10 150,000 135,000 (15,000) Contribution $150,000 $162,000 $12,000 less fixed cost $100,000 $100,000 0 less: depreciation

$20,000 $20,000 0 Profit before tax $30,000 $42,000 $12,000 less: income tax @30% $9,000 $12,600 ($3,600) Profit after tax $21,000 $29,400 $8,400 add: depreciation $20,000 $20,000 0 less: additional working capital ($3,000) Free cash flows additional $5,400

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