Bangers, Inc. is a start-up manufacturer of Australian-style frozen veggie pies

Question

Bangers, Inc. is a start-up manufacturer of Australian-style frozen veggie pies located in San Antonio, Texas. The company is five years old and recently installed the manufacturing capacity to quadruple its unit sales. To jump start the demand for its products, the company founders have hired a local advertising firm to create a series of ads for its new line of meat pies. The ads will cost the firm $350,000 to run for one year. Bangers' management hopes that the advertising will produce annual sales of $2million for its meat pies. Moreover, the firm expects that sales of its veggie pies will increase by $150,000 next year as a result of the company name recognition derived from the meat pie ad campaign. If Bangers operating profits per dollar of new sales revenue are 60 percent and the firm faces a 37 percent tax bracket, what is the incremental operating profit the firm can expect to earn from the ad campaign? Does the decision to place the ad look good from the perspective of the anticipated profits?

1. The incremental operation profit the firm can expect to earn from the as campaign for year 1 is $___________

2.The incremental operation profit the firm can expect to earn from the as campaign for year 2 is $___________

3.The decision to place the ad appears to be an (unacceptable/acceptable) project since the year 1 and year 2 cash flows are significantly (Greater/less) than the $350,000 initial outlay for taking the project.

Explanation / Answer

1 Sales increase by 4 times due to ad campaign Let sales initially be X Thus, 4X= 2000000 Therefore, X= 500000 Incremental sales= 2000000-500000 1500000 Incremental Operating Profits= 60% of sales 900000 Less: Tax= 37%*Operating profits 333000 Net Income 567000 2 Incremental sales in the second year 150000 Incremental Operating Profits= 60% of sales 90000 Less: Tax= 37%*Operating profits 33300 Net Income 56700 3 Whether the decision was acceptable or unacceptable depends on the present value of cash flows to the firm

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