Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2772014 • 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 $4.13 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 $8.31 million this year and by $6.31 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 $2.38 million each year.
Kokomochi’s gross profit margin for the Mini Mochi Munch is 35%, and its gross profit margin averages 25% for all other products. The company’s marginal corporate tax rate is 35% both this year and next year. What are the incremental earnings associated with the advertising campaign?
YEAR 1
Incremental Earnings Forecast ($ 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
Income Statements: YEAR 1 Incremental Earnings Forecast ($ million) Sales of Mini Mochi Munch 8.3100 Other Sales 2.3800 Cost of Goods Sold = Total Sales - Gross Profit = (8.31+2.38) -3.5035 7.1865 Gross Profit= (35% *8.31) + (25%*2.38) 3.5035 Selling, General, and Administrative - Depreciation - EBIT 3.5035 Income Tax at 35% (1.2262) Unlevered Net Income 2.2773 YEAR 2 Incremental Earnings Forecast ($ million) Sales of Mini Mochi Munch 6.3100 Other Sales 2.3800 Cost of Goods Sold = (6.31+2.38) - 2.8035 5.8865 Gross Profit = (35% *6.31) + (25%*2.38) 2.8035 Selling, General, and Administrative - Depreciation - EBIT 2.8035 Income Tax at 35% (0.9812) Unlevered Net Income 1.8223
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