COMPLETE THE TABLE FOR YEAR 1 AND YEAR 2. SHOW YOUR STEPS ON SOLVING THE PROBLEM

Question

COMPLETE THE TABLE FOR YEAR 1 AND YEAR 2. SHOW YOUR STEPS ON SOLVING THE PROBLEM.

Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $18 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 $83 million this year and $63 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 $1-7 million each year Kokomochi?s gross profit margin for the Mini Mochi Munch is 31%, 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? Complete the table below: (Round to the nearest dollar.)

Explanation / Answer

COGS = 1- Gross margin ratio

so for mini munch ,Variable cost ratio = 1- .31 = .69

COGS = .69 * 8,700,000 = $ 6,003,000

For other products ,Variable cost ratio = 1- .23 = .77

COGS =1,700,000 * .77 = $ 1,309,000

Total COGS = 6,003,000+ 1,309,000

                  = 7,312,000

year1 sales of mini munch 8,700,000 other sales 1,700,000 less:Cost of goods sold ** (7,312,000) Gross profit 3,088,000 Selling ,general and adm.expense (3,800,000) Depreciation 0 EBIT (712,000) Income tax @35% - 249,200 unlevered nt income [-712000- (-249,200) = [-712000+ 249200] (462,800)

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