Question

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?

Answer 1

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