Honda Motor Company is considering offering a $ 2 comma 000$2,000 rebate on its minivan, lowering the vehicle's price from $ 30 comma 000$30,000 to $ 28 comma 000$28,000. The marketing group estimates that this rebate will increase sales over the next year from 40 comma 00040,000 to 55 comma 00055,000 vehicles. Suppose Honda's profit margin with the rebate is $ 6 comma 000$6,000 per vehicle. If the change in sales is the only consequence of this decision, what are its benefits and costs? Is it a good idea?

Question

Business

Uriah Schultz

31 October, 04:50

Honda Motor Company is considering offering a $ 2 comma 000$2,000 rebate on its minivan, lowering the vehicle's price from $ 30 comma 000$30,000 to $ 28 comma 000$28,000. The marketing group estimates that this rebate will increase sales over the next year from 40 comma 00040,000 to 55 comma 00055,000 vehicles. Suppose Honda's profit margin with the rebate is $ 6 comma 000$6,000 per vehicle. If the change in sales is the only consequence of this decision, what are its benefits and costs? Is it a good idea?

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Answers (1)

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Hudson Bolton · Answer 1

Cost of rebate = $80 million

Benefit = $90,000,000

Explanation:

As per the data given in the question,

1)

Cost of the rebate = Reduction in profit * No. of sales in units without rebate

= $2,000 * 40,000

= $80,000,000

Cost of rebate = $80 million

2)

Benefit = Profit per vehicle * (No. of sales in units with rebate - No. of sales in units without rebate)

=$6,000 * (55,000 - 40,000)

= $90,000,000

Hence, Benefit = $90,000,000

Here, benefit is greater than the cost of rebate, therefore net profit is $20 million. Hence it is a good idea to offer rebate