Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $6.2 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 $10.2 million this year and $8.2 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 $2.2 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 32%, and its gross profit margin averages 21% 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? Complete the table below: (Round to the nearest dollar.) Year 1 Incremental Earnings Forecast Sales of Mini Mochi Munch Other Sales Cost of Goods Sold Gross Profit Selling, General, and Admin. Expenses Depreciation EBIT Income tax at 35% Unlevered Net Income

Answer 1

(Figures are in $)
Incremental earnings forecast	Year 1
Sales of Mini Mochi Munch	10,200,000
Other sales	2,200,000
Cost of goods sold	-          8,674,000
Gross profit	3,726,000
Selling, general and administrative expenses	-          6,200,000
Depreciation	-
EBIT	-          2,474,000
Income tax @ 35%	865,900
Unlevered net income	-          1,608,100

The above table has been presented in $ terms. I have made another table in which amounts are shown in '000 $.

(Figures are in '000 $)
Incremental earnings forecast
Sales of Mini Mochi Munch	10,200
Other sales	2,200
Cost of goods sold	-          8,674
Gross profit	3,726
Selling, general and administrative expenses	-          6,200
Depreciation	-
EBIT	-          2,474
Income tax @ 35%	866
Unlevered net income	-          1,608