A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer plans to spend promoting this product this year, which is expected to expand the sales of this product to this year and next year. They do expect there will be loss of sales of 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) $1.625 million
B) $1.26 million
C) $2.11 million
D) $4.40 million

Question

A brewer is launching a new product: brewed ginger ale with a low alcohol content. The brewer plans to spend  promoting this product this year, which is expected to expand the sales of this product to  this year and  next year. They do expect there will be loss of sales of  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) $1.625 million 
B) $1.26 million 
C) $2.11 million 
D) $4.40 million

Quizplus · Accepted Answer

A) ($11 - $4) × 40% - ($1 × 30%) = $2.5; $2.5 × 0.65 = $1.625 million

A Brewer Is Launching a New Product: Brewed Ginger Ale