Boulangerie Bouffard expects to sell 1 million croissants next year for $1.25 each. Variable cost of a croissant is $0.75. Fixed costs are $150,000, depreciation $200,000 and the tax rate is 25%. If the bakery can increase the price of a croissant to $1.50 and all other variables remain the same, free cash flow will increase by

Question

Quizplus · Accepted Answer

First, let's calculate the current free cash flow:

Revenue = 1,000,000 x $1.25 = $1,250,000
Total cost = (variable cost + fixed cost + depreciation) = (1,000,000 x $0.75 + $150,000 + $200,000) = $1,100,000
Taxable income = revenue - total cost = $1,250,000 - $1,100,000 = $150,000
Taxes = taxable income x tax rate = $150,000 x 0.25 = $37,500
Free cash flow = taxable income - taxes = $150,000 - $37,500 = $112,500

Now, let's calculate the new free cash flow if the bakery can increase the price of a croissant to $1.50:

Revenue = 1,000,000 x $1.50 = $1,500,000
Total cost = (variable cost + fixed cost + depreciation) = (1,000,000 x $0.75 + $150,000 + $200,000) = $1,100,000
Taxable income = revenue - total cost = $1,500,000 - $1,100,000 = $400,000
Taxes = taxable income x tax rate = $400,000 x 0.25 = $100,000
Free cash flow = taxable income - taxes = $400,000 - $100,000 = $300,000

The increase in free cash flow is:
New free cash flow - current free cash flow = $300,000 - $112,500 = $187,500

Therefore, the correct answer is C) $187,500.

Boulangerie Bouffard Expects to Sell 1 Million Croissants Next Year