Company will spend 4.5 million on advertising for a new product. Ads will boost sales by 10.1 million first year and 8.1 million 2nd year plus increase other product sales by 2.2 million each year. The new product will have a gross profit margin of 33% and gross profit margin on existing products will increase by 20%. corporate tax rate is 25%. My Excel answer is below. Am I correct? For the TOTAL GROSS PROFIT, I added the gross profit from both the new product and existing product. Normally, I would subtract COGS from Sales It seems here it is given with the %. For TAXES, I multiplied EBIT to the 25%. For INCREMENTAL EARNINGS, I subtracted Taxes from EBIT. Incremental Earnings Forecast (in 000s) 1 2 Sales of new product 10.1 8.1 Sales of other products 2.2 2.2 Gross Profit for new product is 33% 3.33 2.67 Gross Profit for other products is 20% 0.44 0.44 Total Gross Profit 3.8 3.1 Selling, General and Administrative Expense (advertising) 4.5 0.0 EBIT -0.7 3.1 Taxes -0.18 0.78 Incremental Earnings -0.5 2.3
Company will spend 4.5 million on advertising for a new product. Ads will boost sales by 10.1 million first year and 8.1 million 2nd year plus increase other product sales by 2.2 million each year. The new product will have a gross profit margin of 33% and gross profit margin on existing products will increase by 20%. corporate tax rate is 25%. My Excel answer is below. Am I correct? For the TOTAL GROSS PROFIT, I added the gross profit from both the new product and existing product. Normally, I would subtract COGS from Sales It seems here it is given with the %. For TAXES, I multiplied EBIT to the 25%. For INCREMENTAL EARNINGS, I subtracted Taxes from EBIT. Incremental Earnings Forecast (in 000s) 1 2 Sales of new product 10.1 8.1 Sales of other products 2.2 2.2 Gross Profit for new product is 33% 3.33 2.67 Gross Profit for other products is 20% 0.44 0.44 Total Gross Profit 3.8 3.1 Selling, General and Administrative Expense (advertising) 4.5 0.0 EBIT -0.7 3.1 Taxes -0.18 0.78 Incremental Earnings -0.5 2.3
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Incremental earnings:
Company will spend 4.5 million on advertising for a new product. Ads will boost sales by 10.1 million first year and 8.1 million 2nd year plus increase other product sales by 2.2 million each year. The new product will have a gross profit margin of 33% and gross profit margin on existing products will increase by 20%. corporate tax rate is 25%.
My Excel answer is below. Am I correct?
For the TOTAL GROSS PROFIT, I added the gross profit from both the new product and existing product. Normally, I would subtract COGS from Sales It seems here it is given with the %.
For TAXES, I multiplied EBIT to the 25%.
For INCREMENTAL EARNINGS, I subtracted Taxes from EBIT.
| Incremental Earnings |
1 | 2 |
| Sales of new product | 10.1 | 8.1 |
| Sales of other products | 2.2 | 2.2 |
| Gross Profit for new product is 33% | 3.33 | 2.67 |
| Gross Profit for other products is 20% | 0.44 | 0.44 |
| Total Gross Profit | 3.8 | 3.1 |
| Selling, General and Administrative Expense (advertising) | 4.5 | 0.0 |
| EBIT | -0.7 | 3.1 |
| Taxes | -0.18 | 0.78 |
| Incremental Earnings | -0.5 | 2.3 |
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