Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert​ product, the Mini Mochi Munch. Kokomochi plans to spend

$5.8

million on​ TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by

$10.3

million this year and

$8.3

million next year. In​ addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try​ Kokomochi's other products. As a​ result, sales of other products are expected to rise by

$1.6

million each year.​Kokomochi's gross profit margin for the Mini Mochi Munch is

34%​,

and its gross profit margin averages

23%

for all other products. The​ company's marginal corporate tax rate is

35%

both this year and next year. What are the incremental earnings associated with the advertising​ campaign?

Answer 1

Gross Profit in Year 1 = (sales of Mini mochi munch * Gross profit margin) + (sales of othe products * gross profit margin)

= ($10.3 million *34% ) + ($1.6 million * 23%)

= $3,502,000 + $368,000

= $3,870,000

Cost of Goods sold in year 1 = Saels in year 1 - Gross Profit in Year 1

= $10.3 million + $1.6 million - $3,870,000

= $8,030,000

Gross Profit in Year 2 = (sales of Mini mochi munch * Gross profit margin) + (sales of othe products * gross profit margin)

= ($8.3 million *34% ) + ($1.6 million * 23%)

= $2,822,000 + $368,000

= $3,190,000

Cost of Goods sold in year 2 = Saels in year 2 - Gross Profit in Year 2

= $8.3 million + $1.6 million - $3,190,000

= $6,710,000

Incremental Earnings Forecast	Year 1	Year 2
Sales of Mini Mochi Munch (A)	10,300,000	8,300,000
Other Sales (B)	1,600,000	1,600,000
Cost of Goods Sold (C)	8,030,000	6,710,000
Gross Profit (D = A+B-C)	3,870,000	3,190,000
Selling, General and Admin Expenses (E )	5,800,000	0
Depreciation (F)	0	0
EBIT (G = D-E-F)	-1,930,000	3,190,000
Income Tax at 35% (H = E*35%)	-675,500	1,116,500
Unlevered net income (I = G-H)	-1,254,500	2,073,500