Bangers Inc is a star-up manufactor of australian-style frozen veggie pies locat

Question

Bangers Inc is a star-up manufactor 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 $500,000 to run for one year. Bangers' management hopes that the advertising will produce annual sales of $1.8 millin for its meat pies. Moreover the firm's managmetn experts that sales of its veggie pies will increase by $300,000 next yar as a result of the company name reconginition derived form the meat pie add campaing. If Banger's operating profits per dolllar of new sales revenue are 40 percent and the firm faces a 33 percent tax bracket, what is the incremental operationg profit the firm can expect to eran from teh ad campaign? Does the decision to place the ad look good from the prespective of th anticipated profits?
The incremental operationg profit the firm can expect to earn from the add campaitn for year 1 is $?
Teh incremental operating profit the firm can expect to earn from the add compaign for year 2 is $?
The decision to place the add appears to be an unacceptable or acceptable project since the year 1 and year 2 cash flows are significatly less or greater than the $500,000 intial outlay for taking the project.

Explanation / Answer

Details Year 1 Year 2 Increased sales Meat Pie               1,800,000       1,800,000 Increased sales Veg pie           300,000 Total Incremental revenue               1,800,000       2,100,000 Opearting Profit @40% of sales                  720,000           840,000 Less Tax @33%                  237,600           277,200 Net Profit after Tax                  482,400           562,800 Incremental profit from add campaign in year 1 = $      482,400 Incremental profit from add campaign in year 2 = $      562,800 The decision to place add appears acceptable as the cash flows   in year 1 & year 2 greatly exceeds the $500,000 initial outlay for taking up the project.

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