Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2723874 • Letter: K
Question
Kokomochi is considering the launch of an advertising campaign for its latest dessen product, the Mini Mochi Munch. Kokomochi plans to spend $4.8 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 $7.6 million this year and $5.6 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 $2.4 million each year. Kokomochi's gross profit margin for the Mini Mochi Munch is 34%, 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?Explanation / Answer
Cost of goods sold = 1- gross margin
For kokomochi cost of goods sold would be
Cost of goods sold = 1- 0.34 = 66%
For others, cost of goods sold would be
Cost of goods sold = 1- 0.22
= 78%
Total cost of goods sold = 7600,000 x 66% + 2400000 x78%
= 6,888,000
Sales of Minimochi
7600000
other sales
2400000
cost of goods sold
-6888000
Gross profit
3112000
Selling gen and admin exp
-4800000
Depreciation
0
EBIT
-1688000
Income tax 35%
590800
Unlevered Net Income
-1097200
Sales of Minimochi
7600000
other sales
2400000
cost of goods sold
-6888000
Gross profit
3112000
Selling gen and admin exp
-4800000
Depreciation
0
EBIT
-1688000
Income tax 35%
590800
Unlevered Net Income
-1097200
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