Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert​ product, the Mini Mochi Munch. Kokomochi plans to spend $ 6.5 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 $ 10.1 million this year and $ 8.1 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 $ 2.1 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

Answer:

The incremental earnings are $0.4251

Explanation:

All those costs that are incremental costs that arise on the following principal:

"If we take decision, there is a cost and

If there is no decision, there is no cost."

This means that:

Incremental cost = Cash flow due to taking decisions less Cash flows due to not taking decisions

Incremental Earnings Forecast                 ($ million)             ($ million)

Gross Profit of Mini Mochi Munch                    

Year 1      10.1 * 34%                                       3.434

Year 2     8.1 * 34%                                        2.754                  6.188

Gross Profit of Other products

Year 1      2.1 * 23%                                        0.483

Year 2     2.1 * 23%                                       0.483                  0.966

Advertising cost                                                                           (6.5)  

Net Operating Cash Flow                                                         0.654  

Tax at the rate 35%                                                                 (0.2289)

Net Cash flow                                                                           0.4251