Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2723890 • 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 $4.8 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 $7.6 million this year and $5.6 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, sale* of other products are expected to rise by $2.4 million each year. Kokomochi's grow profit margin for the Mini Mochi Munch is 34%, and its gross profit margin averages 22% for all other products. The company's marginal corporate tax rate is 35% both this year and next year. What are the incremental earnings associated with the advertising campaign? Complete the table below: (Round to the nearest dollar.)Explanation / Answer
Table showing incremental Earning forecast ($,000):
Incremental Earning Forecast
Year 1
Year 2
Sales of Mini Mochi Munch
7600
5600
Other Sales
2400
2400
Cost of Goods Sold
(6888)
(5568)
[{5600*(1-0.34)}+{2400*(1-0.22)}]
Gross Profit
3112
2432
Selling, General & Admin.
(4800)
0
Depreciation
0
0
EBIT
1688
2432
Income tax at 35%
(590.80)
(851.20)
Unlevered Net Income
1097.20
1580.80
Incremental Earning Forecast
Year 1
Year 2
Sales of Mini Mochi Munch
7600
5600
Other Sales
2400
2400
Cost of Goods Sold
(6888)
(5568)
[{5600*(1-0.34)}+{2400*(1-0.22)}]
Gross Profit
3112
2432
Selling, General & Admin.
(4800)
0
Depreciation
0
0
EBIT
1688
2432
Income tax at 35%
(590.80)
(851.20)
Unlevered Net Income
1097.20
1580.80
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