Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2785702 • 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 $5.36 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 $11.51 million this year and $ 9.51 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 $2.35 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 33%, and its gross profit margin averages 24% 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?
Note: Assume that the company has adequate positive income to take advantage of the tax benefits provided by any net losses associated with this campaign
Explanation / Answer
Incremental earnings associated = Incremental Earning or year-1 + Incremental Earning or year-2
= $2835495 (WN#1) + $2406495 (WN#2)
= $5241990
WN#1
Incremental Earning or year-1 = (Incremental Sales of Mini Mochi x Gross margin of Mini Mochi + Incremental Sales of other products x Gross margin of other products) x (1-Tax Rate)
= ($11510000 x 33% + $2350000 x 24%) x (1-0.35)
= $4362300 x 0.65
= $2835495
WN#2
Incremental Earning or year-2 = (Incremental Sales of Mini Mochi x Gross margin of Mini Mochi + Incremental Sales of other products x Gross margin of other products) x (1-Tax Rate)
= ($9510000 x 33% + $2350000 x 24%) x (1-0.35)
= $3702300 x 0.65
= $2406495
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