Question

Honda Motor Company is considering offering a

$1,900

rebate on its​ minivan, lowering the​ vehicle's price from

$30,500

to

$28,600.

The marketing group estimates that this rebate will increase sales over the next year from

40,400

to

55,700

vehicles. Suppose​ Honda's profit margin with the rebate is

$5,250

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 : Evaluation of Incremental Profit :

Incremental Profit on Sale of Additional Vehicle = Profit Margin with Rebate * Additional Vehicle sold

= 5250 * (55700 - 40400)

= 80,325,000

Loss on Sale of old vehicle due to Rebate = Rebate * Number of vehicles that can be sold without Rebate

= 1900 * 40400

= 76,760,000

Incremental Profit = 80,325,000 - 76,760,000 = 3,565,000

There is incremental Benefit of 3,565,000 .Therefore it can be treated as a good offer.