Question

Honda Motor Company is considering offering a $ 1 comma 800 rebate on its​ minivan, lowering the​ vehicle's price from $ 30 comma 500 to $ 28 comma 700. The marketing group estimates that this rebate will increase sales over the next year from 40 comma 200 to 54 comma 600 vehicles. Suppose​ Honda's profit margin with the rebate is $ 6 comma 500 per vehicle. If the change in sales is the only consequence of this​ decision, what are its costs and​ benefits? Is it a good​ idea?​ Hint: View this question in terms of incremental profits.

Answer 1

Answer:

As the benefit of offering the rebate is $21,240,000 ($93,600,000 - $72,360,000) higher than the cost of rebate, the opportunity is beneficial for the company.

Explanation:

Here, the rebate offering of considered as an opportunity to increase the profits. The rebate given in the question is $1800.

1. Cost of the Opportunity:

The cost of the rebate offering = 40,200 Units * $1,800 per unit

The cost of the rebate offering = $72,360,000

2. Benefit of the Opportunity:

The benefit of the opportunity = (Additional Units sold * Profit without rebate)

Here,

Additional units sold are 14,400 Units (54,600 - 40,200).

Profit Margin with rebate is $6500

Now, by putting values, we have:

The benefit of the opportunity = 14,400 Units * $6,500 = $93,600,000

As the benefit of offering the rebate is $21,240,000 ($93,600,000 - $72,360,000) higher than the cost of rebate, the opportunity is beneficial for the company.