Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2648723 • Letter: K
Question
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5.7 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 $9.1 million this year and $7.1 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 $1.9 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 37%, and its gross profit margin averages 20% 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?Explanation / Answer
Incremental revenue forecast
Year 1 Mini mochi munch
Increase in sales =9100000
Gross profit ratio = Gross profit/Sales
0.37 = Gross profit/9100000
Gross profit = 9100000*0.37
Gross profi = 3367000
Cost of goods sold = 9100000-3367000
=5733000
Year 1 ( Other Products)
Increase in sales = 1900000
Gross profit ratio = Gross Profit/ Sales
0.20 = Gross profit / 1900000
Gross profit = 1900000*0.20
= 380000
Cost of goods sold = 1900000-380000
= 1520000
Year 2 Mini mochi munch
Increment in sales = 7100000
Gross profit = 7100000*0.37
= 2627000
Cost of goods sold = 7100000-2627000
= 4473000
Year 2 other products
Same as year 1
Loss in year 1 is carried forward in second year therefore tax is computed on income after adjustment of loss
Incremental earning = 2638100-1953000
=685100
Particulars Year 1 Year 2 Sales Mini mochi munch 9100000 7100000 Other product sales 1900000 1900000 Cost of goods sold 7253000 5993000 Gross profit 3747000 3007000 Selling general and admin expenses 5700000 0 Depreciation 0 0 EBIT (1953000) 3007000 Income tax 0 368900 Unlevered net income (1953000) 2638100Related Questions
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