Question

# Kokomochi is considering the launch of an advertising campaign for its latest dessert​ product, the Mini...

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

= 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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