Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2779826 • 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 $5.2 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 $10.2 million this year and S8.2 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 36%, 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? Complete the table below: (Round to the nearest dollar.) Year 1 Incremental Earnings Forecast Sales of Mini Mochi Munch Other Sales Cost of Goods Sold Gross Profit Selling, General, and Admin. Expenses Depreciation EBIT Income tax at 35% Unlevered Net Income 0Explanation / Answer
Incremental Sales of Mini Mochi Munch = $ 10.2 M = 10 (rounded off)
Incremental Other Sales = $ 1.5 M( 1 rounded off)
Cost of Goods Sold for Mini Mochi Much =36% * 10.2 M = $ 3.672 M(4 rounded off)
Cost of Goods Sold for Other products = 23% *1.5 = $ 0.345 M
Cost of Goods Sold = $ 4.017 M
Gross Profit = (10.2+1.5) - 4.017 = $ 7.683 M
SG&A Expenses = 5.2
Depreciation = 0
EBIT = 7.683- 5.2 = 2.483
Income tax at 35 % = 35%* 2.483 = 0.86905M = $ 1 M
Unlevered Net Income = EBIT*(1-t) = 2.483-0.86905 = 1.61395 = $ 2 M(rounded off)
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