Incremental earnings from advertising synergies)Bangers, Inc. is a start-up manu
ID: 2741608 • Letter: I
Question
Incremental earnings from advertising synergies)Bangers, Inc. is a start-up manufacturer of Australian-style frozen veggie pies located in San Antonio, Texas. The company is five years old and recently installed the manufacturing capacity to quadruple its unit sales. To jump start the demand for its products, the company founders have hired a local advertising firm to create a series of ads for its new line of meat pies. The ads will cost the firm $45,000 to run for one year. Bangers' management hopes that the advertising will produce annual sales of $22 million for its meat pies. Moreover, the firm's management expects that sales of its veggie pies will increase by $300,000 next year as a result of the company name recognition derived from the meat pie ad campaign. If Bangers' operating profits per dollar of new sales revenue are 45 percent and the firm faces a 34 percent tax bracket, what is the incremental operating profit the firm can expect to earn from the ad campaign? Does the decision to place the ad look good from the perspective of the anticipated profits?
The incremental operating profit the firm can expect to earn from the ad campaign for year 1 is $ ( Round to the nearest dollar.)
The incremental operating profit the firm can expect to earn from the ad campaign for year 2 is $ (Round to the nearest dollar.)
Explanation / Answer
New Sale revenue = $22 mn + $0.3 Mn = $22.3 Mn
Incremental Operating Profit before tax= 22.3*45% = $10.035 Mn (It is assumed that operating profit is after charging cost of ad campaign)
Incremental Operating Profit after tax= 22.3*45% = $10.035 Mn*(1-0.34) = $6,623,100
The incremental operating profit the firm can expect to earn from the ad campaign for year 1 is $6,623,100
The incremental operating profit the firm can expect to earn from the ad campaign for year 2 would be :
$6,623,100 + After tax saving in ad campaign cost since ad canpaign cost will not be there in year 2 but incremental sales will be there
= $6,623,100 + 45000*(1-0.34) = $6,652,800