Kokomochi is considering the launch of an advertising campaign for its latest de

Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $3.03 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 $10.78 million this year and $8.78 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 $3.14 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 35%, and its gross profit margin averages 25% for all other products. The company's marginal corporate tax rate is 30% both this year and next year.

What are the unlevered net incomes associated with the advertising campaign?

How do you find the COGS in this problem?

Explanation / Answer

A) Unlevered net incomes associated with the advertising campaign = EBIT x (1 - t)

EBIT = Gross Profit - Avertisement cost

Gross profit = (10.78 x 35%) + (3.14 x 25%) = $4.558 million

EBIT = 4.558 - 3.03 = $1.528 million

Unlevered Net Income = 1.528 x (1 - 0.30) = $1.0696 million or $1.07 million

B) COGS = Sales - Gross Profit = (10.78 + 3.14) - 4.558 = $9.362 million

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