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 $10.5 million this year and $8.5 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 $1.8 million each year.​Kokomochi's gross profit margin for the Mini Mochi Munch is 38%​, and its gross profit margin averages 21% 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?

Incremental Earnings Forecast	Year 1
Sales of Mini Mochi Munch	?
Other Sales	?
Cost of Goods Sold	?
Gross Profit	?
Selling, General, and Admin. Expenses	?
Depreciation	?
EBIT	?
Income tax 35%	?
Unlevered Net Income	?

Answer 1

Gross Profit on Mini Mochi Munch = $10,500,000 * 38% = $3,990,000

Gross Profit on Other products = $1,800,000 * 21% = $378,000

Total Gross Profit = $3,990,000 + $378,000 = $4,368,000

Total Sales = $10,500,000 + $1,800,000 = $28,500,000

Cost of Goods Sold = Total Sales _ Total Gross PRofit = $28,500,000 - $4,368,000 = $24,132,000