Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5.5 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 $8.2 million this year and $6.2 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 $1.8 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 37%, and its gross profit margin averages 22% for all other products. The company's marginal corporate tax rate is 25% both this year and next year. Question 3a HomeworkAnswered What are the incremental earnings associated with the advertising campaign in its first year

Answer 1

Kokomochi

The incremental earnings associated with the advertising campaign in its first year is:

= $0.3 million.

Step-by-step explanation:

a) Data and Calculations:

Advertising campaign cost = $5.5 million

Mini Mochi Other Products Total

Much

Incremental sales revenue $8.2 million 1.8 million $10 million

Incremental cost of goods sold 5.2 million 1.4 million 6.6 million

Incremental gross profit $3.0 million 0.4 million 3.4 million

Advertising cost 3.1 million

Incremental earnings associated with the advertising campaign = $0.3 million

Advertising cost apportioned to:

This year = $8.2/$14.4 * $5.5 million = $3.1 million

Next year = $6.2/$14.4 * $5.5 million = $2.4 million