(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 $400,000 to run for one year Bangers' management hopes that the advertising will produce annual sales of $2.2 million for its meat pies.
Moreover the firm's management expects that sales of its veggie pies will increase by $200,000 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 50 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 $.
The incremental operating profit the firm can expect to earn from the ad campaign for year 2 is $.
The decision to place the ad appears to be an project since the year 1 and year 2 cash flow are significantly than the $400,000 initial outlay for taking the project (Select from the drop-down menus.)