Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert​ product, the Mini Mochi Munch. Kokomochi plans to spend $4.6 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 $7.8 million this year and $5.8 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 $2.3 million each year.​Kokomochi's gross profit margin for the Mini Mochi Munch is 37%​, and its gross profit margin averages 22% 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?

Complete the table​ below:  ​(Round to the nearest​ dollar.)

Incremental Earnings Forecast	Year 1
Sales of Mini Mochi Munch	$
Other Sales	$
Cost of Goods Sold	$
Gross Profit	$
Selling, General, and Admin. Expenses	$
Depreciation		0
EBIT	$
Income tax at 35%	$
Unlevered Net Income	$

Answer 1

Incremental earnings of year 1 are as follows:

Incremental Earnings Forecast	Year 1
Sales of Mini Mochi Munch	$7,800,000
Other Sales	$2,300,000
Cost of Goods Sold	$6,708,000
Gross Profit	$3,392,000
Selling, General, and Admin. Expenses	$4,600,000
Depreciation	0
EBIT	-$1,208,000
Income tax at 35%	$422,800
Unlevered Net Income	-$785,200

Cost of goods sold:

Mini Mochi = 7,800,000*63% = $4,914,000

Other Products = 2,300,000*78% = $1,794,000

Total = $6,708,000