8-1

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $3.75 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 $11.36 million this year and $9.36 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 $3.89 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 34%, and its gross profit margin averages 25% for all other products. The company's marginal corporate tax rate is 33% both this year and next year. What are the incremental earnings associated with the advertising campaign?

Note: Assume that the company has adequate positive income to take advantage of the tax benefits provided by any net losses associated with this campaign.

Calculate the incremental earnings for year 1 below:(Round to three decimal places.)

		Year 1
Incremental Earnings Forecast ($ million)
Sales of Mini Mochi Munch	$
Other Sales	$
Cost of Goods Sold	$
Gross Profit	$
Selling, General, and Administrative	$
Depreciation	$
EBIT	$
Income Tax at 33%	$
Incremental Earnings	$

Calculate the incremental earnings for year 2 below: (Round to three decimal places.)

Year 2

Incremental Earnings Forecast ($ million)

Sales of Mini Mochi Munch

$______

Other Sales

$_______

Cost of Goods Sold

$______

Gross Profit

$_____

Selling, General, and Administrative

$_____

Depreciation

$______

EBIT

$______

Income Tax at 33%

$_____

Incremental Earnings

$_______