Answer:
Kokomochi
YEAR 1
Incremental Earnings Forecast ($ million)
Sales of Mini Mochi Munch $8,310,000
Other Sales $2,380,000
Other sales revenue $10,690,000
Cost of Goods Sold $7,186,500
Gross Profit $3,503,500
Selling, General, and Administrative $4,130,000
Depreciation $0
EBIT ($ 626,500)
Income Tax at 35% $0
Unlevered Net Income $0
Calculate the unlevered net income for year 2 below:
YEAR 2
Sales of Mini Mochi Munch $6,310,000
Other Sales $2,380,000
Total sales revenue $8,690,000
Cost of Goods Sold $5,886,500
Gross Profit $2,803,500
Selling, General, and Administrative $ 0
Depreciation $0
EBIT $2,803,500
Income Tax at 35% $981,225
Unlevered Net Income $1,822,275
Explanation:
a) Data and Calculations:
Advertising campaign expenses = $4.13 million
Incremental sales revenue from Mini Mochi Munch = $8.31 million
Next years incremental sales revenue from Mini Mochi Munch = $6.31 million
Incremental sales revenue from other products = $2.38 million each year
Gross profit margin or the Mini Mochi Munch = 35%
Gross profit margin for other products = 25%
Marginal corporate tax rate = 35%
Cost of goods sold:
Year 1:
Mini Mochi Much = 65% (100 - 35%) of sales = 65% * $8.31 m = $5,401,500
Other products = 75% (100 - 25%) of sales = 75% * $2.38 m = $1,785,000
Total cost of goods sold = $7,186,500
Year 2:
Mini Mochi Much = 65% (100 - 35%) of sales = 65% * $6.31 m = $4,101,500
Other products = 75% (100 - 25%) of sales = 75% * $2.38 m = $1,785,000
Total cost of goods sold = $5,886,500
b) The company will incur a loss in the first year, which will be recovered by the second year's profit, because advertising expense are not capitalized or spread over the two years.
