Question
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $3.24 million on
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $3.24 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 $11.67 million this year and
$9.67 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 $2.51 million each year.
Kokomochi's gross profit margin for the Mini Mochi Munch is 35%, and its gross profit margin averages
25% for all other products. The company's marginal corporate tax rate is 38% both this year and next year. What are the incremental earnings associated with the advertising campaign?
Note:
Assume that the company has adequate positive income to take advantage of the tax benefits provided by any net losses associated with this campaign.
Calculate the incremental earnings for year 1 below:(Round to three decimal places.)
|
| Year 1 |
Incremental Earnings Forecast ($ million) |
|
|
Sales of Mini Mochi Munch | $ |
|
Other Sales | $ |
|
Cost of Goods Sold | $ |
|
Gross Profit | $ |
|
Selling, General, and Administrative | $ |
|
Depreciation | $ |
|
EBIT | $ |
|
Income Tax at 38% | $ |
|
Incremental Earnings | $ |
|
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