Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $ 4.49 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 $ 11.33 million this year and $ 9.33 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 $ 2.71 million each year.

Kokomochi's gross profit margin for the Mini Mochi Munch is 36 %, and its gross profit margin averages 25 % for all other products. The company's marginal corporate tax rate is 45 % 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.

Compute

Year 1 Year2

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 45%

Incremental Earnings