Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2657064 • 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 $5.5 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 $9.6 million this year and $7.6 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 $2.1 million each year.
?Kokomochi's gross profit margin for the Mini Mochi Munch is 35%?, and its gross profit margin averages 22% 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
Year 1 Year 2 Sales of Mini Mochi Munch 9600000 7600000 Other Sales 2100000 2100000 Cost of Goods Sold -7878000 -6578000 Gross Profit 3822000 3122000 Selling, General & Admin. 5500000 0 Depreciation 0 0 EBIT -1678000 3122000 Income tax at 35% 587300 -1092700 Unlevered Net Income -1090700 2029300
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