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 sales will fall by 50,000 croissants.Free cash flow will increase or decrease by:

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The increase in price to $1.50 will result in a decrease in sales volume to 950,000 croissants. The new revenue will be $1,425,000 (950,000 x $1.50). The variable cost will be $712,500 (950,000 x $0.75). The contribution margin will be $712,500 ($1,425,000 - $712,500). After subtracting fixed costs and depreciation, the operating income before tax is $362,500 ($712,500 - $150,000 - $200,000). After a 25% tax, the net income is $271,875. Adding back depreciation, the free cash flow is $471,875. The original free cash flow was $340,625. The increase is $131,250 ($471,875 - $340,625).

Boulangerie Bouffard Expects to Sell 1 Million Croissants Next Year