Question

Honda Motor Company is considering offering a $ 2 comma 000 rebate on its​ minivan, lowering the​ vehicle's price from $ 30 comma 000 to $ 28 comma 000. The marketing group estimates that this rebate will increase sales over the next year from 40 comma 000 to 55 comma 000 vehicles. Suppose​ Honda's profit margin with the rebate is $ 6 comma 000 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:

It is a good idea

Explanation:

Without the rebate, the annual revenue to the company given a price of $30,000 and a volume of 40,000 vehicles

= 30,000 * 40,000 = $1,2 billion.

However, with the rebate, total annual revenue given a price of $28,000 and a volume of 55,000 vehicles, would be

= $28,000 * 55,000 = $1.54 billion.

Thus, the rebate results in a $340 million increase in revenue, and it is therefore a good idea.

The likely costs of the rebate may be a necessary increase in man hours and the attendance increase in labour cost as more workers are needed to produce the increased volume. Other direct costs of production may increase too.

The likely benefit, apart from the increase revenue identified above, is the likely increase in market share for the company.