Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the mini mochi munch. kokomochi plans to spend $ 5.9 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 $ 8.6 million this year and $ 6.6 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 $ 2.3 million each year. kokomochi's gross profit margin for the mini mochi munch is 32 %, and its gross profit margin averages 25 % 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?

Incremental earnings= -1.677 + 1.7485= 0.0715= $715,000

Explanation:

Giving the following information:

Kokomochi plans to spend $ 5.9 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 $ 8.6 million this year and $ 6.6 million next year. Also, 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 $ 2.3 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 32 %, and its gross profit margin averages 25 % for all other products. The company's marginal corporate tax rate is 35 % both this year and next year.

Year 1:

Sales= 8.6 million + 2.3= 10.9

COGS= (8.6*0.68) + (2.3*0.75)= 7.58

Gross profit= 3.32

Advertising campaign= 5.9

EBT= -2.58

Save in tax= 2.58* 0.35= 0.903

Net income= -1.677

Year 2:

Sales= 6.6 + 2.3= 8.9

COGS= (6.6*0.68) + (2.3*0.75)= 6.21

Gross profit= 2.69

Tax= 0.9415

Net income= 1.7485

If Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $ 5.9 million on TV, radio, and print advertising this year for the campaign.  The incremental earnings associated with the advertising campaign is:    - $1,672,450

Incremental earnings forecast  Year 1

Sales of Mini Mochi Munch                                             $8,600,000

Other sales                                                                       $2,300,000

Less Cost of goods sold                                                 ($7,573,000)

[(100%-32%×$8,600,000)+(100%-25%×$2,300,000]

Gross profit                                                                        $3,327,000

[($8,600,000+$2,300,000)-  $7,573,000]

Less Selling, general and administrative expenses       ($5,900,000)

Depreciation                                                                             $0  

EBIT                                                                                   -$2,573,000

($3,327,000-$5,900,000)

Income tax at 35%                                                             $900,550

(35%×$2,573,000)

Unlevered net income                                                    - $1,672,450

Inconclusion if Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $ 5.9 million on TV, radio, and print advertising this year for the campaign.  The incremental earnings associated with the advertising campaign is:    - $1,672,450

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