Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert​ product, the Mini Mochi Munch. Kokomochi plans to spend $ 6.5 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 $ 10.1 million this year and $ 8.1 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 $ 2.1 million each year. ​Kokomochi's gross profit margin for the Mini Mochi Munch is 34 %​, and its gross profit margin averages 23 % 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?

Answer 1

The incremental earnings are $0.4251

Step-by-step explanation:

All those costs that are incremental costs that arise on the following principal:

"If we take decision, there is a cost and

If there is no decision, there is no cost."

This means that:

Incremental cost = Cash flow due to taking decisions less Cash flows due to not taking decisions

Incremental Earnings Forecast ($ million) ($ million)

Gross Profit of Mini Mochi Munch

Year 1 10.1 * 34% 3.434

Year 2 8.1 * 34% 2.754 6.188

Gross Profit of Other products

Year 1 2.1 * 23% 0.483

Year 2 2.1 * 23% 0.483 0.966

Advertising cost (6.5)

Net Operating Cash Flow 0.654

Tax at the rate 35% (0.2289)

Net Cash flow 0.4251