Kokomochi is considering the launch of an advertising campaign for its latest de

Question

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $4.9 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 $10.4 million this year and $8.4 million next year. In addition, the company expects that new consumers who try the Mini Mochi Munch will be more likely to try Kokomochis 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 25% 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?

Explanation / Answer

Solution - Here we need to consider the increase in the sales of Mini Mochi Munch as well as other products and calculate the Cost of both the Sales considering the gross profit margin of 39% and 25 % & therefore the cost of goods sold would be 61% and 75% of Sales resp - or reduce the absolute gross Profit from sales to derive the Cost of Goods sold as shown below

So below is the Incremental Earnings Forecast in thousands for year 1 in the required format

Mini Mochi Munch Other Total A Sales 10400 2200 12600 b Gross Profit Margin % 39% 25% B Gross Profit Margin in $ ( A x b) 4056 550 4606 C Cost of Goods Sold ( A - B) 6344 1650 7994

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