is A brewer is launching a new product; brewed ginger ale with a low alcohol con

Question

is A brewer is launching a new product; brewed ginger ale with a low alcohol content. The brewer plans to spend $3 million promoting this product this year, which is expected to expand its sales of this product to $10 million this year and $8 million next year. They do expect there will be loss of sales of $3 million this year and next year in their other products as customers switch to drinking the new ginger ale. The gross profit margin for the new ginger ale is 40%, the gross profit margin of all of the brewer's other products is 30 and the brewer's marginal corporate tax rate is 35%. What are incremental earnings arising from the promotional campaign this year? and the brewers margial cate akin The rs prolt narpintfyea: O A. $1.40 million OB. $4.00 million O C. $0.84 million O D. $1.56 million

Explanation / Answer

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Correct Answer is $1.56 Million as explained below:

Year 1 Year 2 Total Sale of New Product 10 8 Gross Margin of new product (40%) 4 3.2 7.2 Less: Gross Margin Lost on 3 Million (30%) -0.9 -0.9 -1.8 Net Gross Margin 3.1 2.3 5.4 Less: Promotion Expense -3 -3 Operating incremental Income 0.1 2.3 2.4 Less: Income tax 35% -0.04 -0.81 -0.84 Net Operating Income 0.07 1.50 1.56

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