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 $6.3 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 $8.4 million this year and by $6.4 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 $1.5 million each year. Kokomochi’s gross profit margin for the Mini Mochi Munch is 37%, and its gross profit margin averages 23% for all other products. The company’s marginal corporate tax rate is 35% both this year and next year. What are the incremental earnings associated with the advertising campaign? YEAR 1 Incremental Earnings Forecast ($ million) Sales of Mini Mochi Munch $ ????? Other Sales $ ????? Cost of Goods Sold $ ????? Gross Profit $ ????? Selling, General, and Administrative $ ????? Depreciation $ ????? EBIT $ ????? Income Tax at 35% $ ????? Unlevered Net Income $ ????? Calculate the unlevered net income for year 2 below: YEAR 2 Sales of Mini Mochi Munch $ ????? Other Sales $ ????? Cost of Goods Sold $ ????? Gross Profit $ ????? Selling, General, and Administrative $ ????? Depreciation $ ????? EBIT $ ????? Income Tax at 35% $ ????? Unlevered Net Income $ ?????

Explanation / Answer

year 1 year 2 incremental sales 8400000 6400000 1500000 gross profit rate 37% 37% 23% gross profit 3108000 2368000 345000 profit from the sale of other products 345000 345000 gross profit 3453000 2713000 taxes 35% 1208550 949550 incremental profit due to sales 2244450 1763450

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