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|
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