Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $ 3.26$3.26 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 $ 11.12$11.12 million this year and $ 9.12$9.12 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 $ 2.76$2.76 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 35 %35%, and its gross profit margin averages 24 %24% for all other products. The company's marginal corporate tax rate is 35 %35% both this year and next year. What are the incremental earnings associated with the advertising campaign? Note: Assume that the company has adequate positive income to take advantage of the tax benefits provided by any net losses associated with this campaign. Calculate the incremental earnings for year 1 below: (Round to three decimal places.)
Incremental Earnings this year
Advertising cost = Expense*(1-Tax)
= 3260,000*(1- 35%) = 2119000
Gross income after tax from Mini Mochi sales = Sales*profit margin*(1-Tax)
= 11200,000*35%*(1-0.35)
=2548000
Gross Income after tax from other products
= 2760000*24%*(1-0.35)
=$430,560
Net Incremental earnings = 2548000+ 430,560- 2119000 =$ 859560
Incremental Earnings next year
Gross income after tax from Mini Mochi sales = Sales*profit margin*(1-Tax)
= 9120,000*35%*(1-0.35)
=2074800
Gross Income after tax from other products
= 2760000*24%*(1-0.35)
=$430,560
Net Incremental earnings = 2074800+ 430560 = 2505360
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