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horrorfan [7]
3 years ago
14

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

plans to spend $ 5.9 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 $ 8.6 million this year and $ 6.6 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 $ 2.3 million each year. ​Kokomochi's gross profit margin for the Mini Mochi Munch is 32 %​, and its gross profit margin averages 25 % 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?
Business
1 answer:
Alex3 years ago
3 0

Answer:

Incremental earnings= -1.677 + 1.7485= 0.0715= $715,000

Explanation:

Giving the following information:

Kokomochi plans to spend $ 5.9 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 $ 8.6 million this year and $ 6.6 million next year. Also, 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 $ 2.3 million each year. ​Kokomochi's gross profit margin for the Mini Mochi Munch is 32 %​, and its gross profit margin averages 25 % for all other products. The​ company's marginal corporate tax rate is 35 % both this year and next year.

Year 1:

Sales= 8.6 million + 2.3= 10.9

COGS= (8.6*0.68) + (2.3*0.75)= 7.58

Gross profit= 3.32

Advertising campaign= 5.9

EBT= -2.58

Save in tax= 2.58* 0.35= 0.903

Net income= -1.677

Year 2:

Sales= 6.6 + 2.3= 8.9

COGS= (6.6*0.68) + (2.3*0.75)= 6.21

Gross profit= 2.69

Tax= 0.9415

Net income= 1.7485

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