Question 4
Chipâ€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 90 percent as high if the price is raised 10 percent. Chipâ€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 firmâ€s FCF for the year? (Round answers to nearest whole dollar, e.g. 5,275.)
At $20 per bottle the Chipâ€s FCF is $[img id=”amarker_res_EAT_1321341557118_0_6921636449077235_accountingtextentry_29″ class=”answerMarker” alt=”” src=”http://edugen.wiley.com/edugen/art2/common/pixel.gif”> and at the new price Chipâ€s FCF is $[img id=”amarker_res_EAT_1321341557118_0_6921636449077235_accountingtextentry_31″ class=”answerMarker” alt=”” src=”http://edugen.wiley.com/edugen/art2/common/pixel.gif”>.
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