Bangers Inc is a startup manufacturer of Australianstyle fro

??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 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 40 percent and the firm faces a 30 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?

A)The incremental operating profit the firm can expect to earn from the ad campaign for year 1 is?

Solution

The annual sales increase by 4 times due to advertisement. Let the initial sales be X 4X= 2000000 X = 2000000/4 500000 Incremental Sales 2000000-500000 1500000 Operating profits -600000 Less : Advertising campaign -400000 500000 Less : Tax @ 40% 200000 Incremental operating profit year 1 300000