Kokomochi is considering the launch of an advertising campaign for its latest dessert product,
the Mini Mochi Munch. Kokomochi plans to spend $2.45 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 $11.94 million this year and by $9.94 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 $2.92 million each year.
Kokomochi’s gross profit margin for the Mini Mochi Munch is 36%, and its gross profit margin
averages 24% for all other products. The company’s marginal corporate tax rate is 35% both
this year and next year. What are the incremental earnings associated with the advertising
campaign? Note: Assume that the company has adequate positive income to take advantage of the tax benefits provided by any net losses associated with this campaign.Calculate the unlevered net income for year 1 and year 2 below:Incremental Earnings Forecast ($ million)Year 1Sales of Mini Mochi Munch ___________Other Sales __________Cost of Goods Sold __________Gross Profit __________Selling, General & Admin. __________Depreciation __________EBIT __________Income tax at 35% __________Unlevered Net Income __________
Year 2Sales of Mini Mochi Munch ___________Other Sales __________Cost of Goods Sold __________Gross Profit __________Selling, General & Admin. __________Depreciation __________EBIT __________Income tax at 35% __________Unlevered Net Income __________
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