Question

# Kokomochi is considering the launch of an advertising campaign for its latest des-sert product, the Mini...

Kokomochi is considering the launch of an advertising campaign for its latest des-sert product, the Mini Mochi Munch. Kokomochi plans to spend \$6.2 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 by \$8.2 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 \$2.2 million each year.

Kokomochi’s gross profit margin for the Mini Mochi Munch is 39%, 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?

Below is the table showing calculation of Incremental Earnings:

 Year 1 Year 2 Sale of Mini mochi Munch 10,200,000 8,200,000 Sale of Other Products 2,200,000 2,200,000 Cost of Goods Sold 7,916,000 [(10200000*61%) + (2200000 * 77%)] 6,696,000[(8200000*61%) + (2200000 * 77%)] Gross Profit 4,484,000 [(10200000*39%) + (2200000 * 23%)] 3,704,000[(8200000*39%) + (2200000 * 23%)] Less : Selling and Advertising Expenses (6,200,000) 0 Profit Before Tax (1716000) 3,704,000 Less : Taxes @35% 600600 1,296,400 Net Inome/Incremetal Earnings (1,115,400) 2,407,600