Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert​ product, the Mini Mochi Munch. Kokomochi plans to spend $ 4.9 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 $ 8.8 million this year and $ 6.8 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 $ 1.7 million each year. ​Kokomochi's gross profit margin for the Mini Mochi Munch is 38 %​, 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

Check Explanation.

Step-by-step explanation:

Note that the amount are in millions(dollar).

Year one: the sales of Mini Mochi Munch = $ 8.8 million = 8.8, sales of other products = $ 1.7 million. Hence, the gross profit = (8.8 × 38%) + (8.8 × 23%) = 5.368.

The selling, general and administrative expenses = 4.9 and the depreciation is zero.

Then, the EBIT = the gross profit -selling, general and administrative expenses - Depreciation.

EBIT = 5.368 - 4.9 - 0 = 0.468.

Less income tax at 38% = 0.17784.

incremental earnings= EBIT - Less income tax at 38%.

incremental earnings = 0.468 - 0.17784.

Year two: the sales of Mini Mochi Munch = $ 6.8 million = 6.8, sales of other products = $ 1.7 million. Hence, the gross profit = (6.8 × 38%) + (6.8 × 23%) = 4.148.

The selling, general and administrative expenses = 0, and the depreciation is zero(0).

Then, the EBIT = the gross profit -selling, general and administrative expenses - Depreciation.

EBIT = 4.148 - 4.9 - 0 = −0.752.

Less income tax at 38% = −0.28576.

incremental earnings= EBIT - Less income tax at 38%.

incremental earnings = −0.752 - −0.28576 = −1.03776.