Kokomochi is considering the launch of an advertising campaign for its latest de
ID: 2790436 • Letter: K
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 $8.6 million this year and $6.6 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 $1.5 mlion each year Kokomochi's gross profit margin for the Mini Mochi Munch is 35%, and its gross profit margin averages 20% 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.) Incremental Earnings Forecast Sales of Mini Mochi Munch Other Sales Cost of Goods Sold Gross Profit Selling, General, and Admin. Expenses Depreciation EBIT Income tax at 35% Unlevered Net Income Year 1Explanation / Answer
In Year 1, incremental sales of Mini Mochi Munch = $8.6 million
Sales of other products = $1.5 million
Gross margin on Mini Mochi Munch = 35%
So Gross Profit of Mini Mochi Munch = 8.6*0.35 = $3.01 million
Gross margin on other products = 20%
So Gross Profit of other products = 1.5*0.2 = $0.3 million
Total Gross Profit = 3.01+0.3 = $3.31 million
Total sales - COGS = Gross Profit
Therefore COGS = Total sales - Gross Profit = (8.6+1.5) - 3.31 = $6.79 million
Selling, general and admin expense = $4.9 million (as it is given that company will spend $4.9 million on TV, radio and print advertising)
Depreciation = 0
So EBIT = Gross Profit - Selling, Genereal and Admin expenses = 3.31-4.9 = -1.59 (negative sign indicates loss)
As company is in loss so it will not pay any taxes therefore income tax = 0
Net Income = EBIT - income tax = -1.59-0 = $-1.59 million
So company will post a net loss of $-1.59 million
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.