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 $5.8 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 $9.4 million this year and $7.4 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 $1.6 million each year. Kokom ochi's gross profit margin for the Mini Mochi Munch is 34%, and its gross profit margin averages 21% 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? Incremental Earnings Forecast Sales of Mini Mochi Munch Other Sales Cost of Goods Sold Gross Profit Selling, General, Depreciation EBIT Income tax at 35% Unlevered Net Income Year 1 and Admin. Expenses

Explanation / Answer

1 2 Incremental Earnings Forecast ($000s) Sales of Mini Mochi Munch          9,400          7,400 Other Sales          1,600          1,600 Cost of Goods Sold         (7,468)         (6,148) Gross Profit          3,532          2,852 Selling, General & Admin.         (5,800)                  - Depreciation                  -                  - EBIT         (2,268)          2,852 Income tax at 35%             794            (998) Unlevered Net Income       (1,474)         1,854

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