Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $3.21 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 $10.54 million this year and $8.54 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 $2.84 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 33%, and its gross profit margin averages 25% for all other products. The company's marginal corporate tax rate is 40% both this year and next year. What are the incremental earnings associated with the advertising campaign? Note: Assume that the company has adequate positive income to take advantage of the tax benefits provided by any net losses associated with this campaign. Calculate the incremental earnings for year 1 below: (Round to three decimal places.) Year 1 Incremental Earnings Forecast ($ million) Sales of Mini Mochi Munch $ Other Sales $ Cost of Goods Sold $ $ $ Gross Profit Selling, General, and Administrative Depreciation EBIT $ $ Income Tax at 40% $ Incremental Earnings $

Answer 1

А B C E 1 2 3 4 5 6 7 8 9 10 11 12 Incremental earnings Sales of Mini Mochi Munch Other sales Cost of goods sold Gross profit SG&A expenses Depreciation EBIT Income tax at 40% Incremental earnings Year 1 10540000 2840000 9191800 4188200 3210000 0 978200 391280 586920 Year 2 8540000 2840000 7851800 3528200 0 0 3528200 1411280 2116920 3

EXCEL FORMULA:

A B n D E 1 2 3 4 5 Incremental earnings Sales of Mini Mochi Munch Other sales Cost of goods sold Gross profit SG&A expenses Depreciation EBIT Income tax at 40% Incremental earnings 6 Year 1 10540000 2840000 =C3+C4-C6 =(C3*33%)+(C4*25%) 3210000 0 =C6-C7-C8 =C9*40% =C9-C10 Year 2 8540000 2840000 =D3+D4-D6 =(D3*33%)+(D4*25%) 0 7 8 0 9 10 =D6-07-08 =D9*40% 11 =D9-010 12 13