Question

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?

Answer 1

Cost of rebate = $80 million

Benefit = $90,000,000

Step-by-step 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