A brewer is launching a new product;brewed ginger ale with a low alcohol content.The brewer plans to spend $4 million promoting this product this year,which is expected to expand its sales of this product to $10 million this year and $8 million next year.They do expect there will be loss of sales of $1 million this year and next year in their other products as customers switch to drinking the new ginger ale.The gross profit margin for the new ginger ale is 40%,the gross profit margin of all of the brewer's other products is 30%,and the brewer's marginal corporate tax rate is 35%.What are incremental earnings arising from the promotional campaign this year?
A)$1.95 million
B)$4.290 million
C)$4.68 million
D)$5.28 million

Question

Quizplus · Accepted Answer

Incremental earnings are calculated as: (Incremental Revenue - Incremental Costs - Lost Profit from Other Products) * (1 - Tax Rate). Incremental Revenue = $10 million * 40% = $4 million. Lost Profit = $1 million * 30% = $0.3 million. Incremental Earnings = ($4 million - $4 million - $0.3 million) * (1 - 0.35) = $1.95 million.

A Brewer Is Launching a New Product;brewed Ginger Ale with a Low