Question

1. Honda Motor Company is considering offering a $1,800 rebate on its​ minivan, lowering the​ vehicle's price from $30,900 to $29,100. The marketing group estimates that this rebate will increase sales over the next year from 38,400 to 53,200 vehicles. Suppose​ Honda's profit margin with the rebate is $6,880 per vehicle. If the change in sales is the only consequence of this​ decision, what are its costs and​ benefits? Is it a good​ idea?​ Hint: View this question in terms of incremental profits. The cost of the rebate will be ​$ _____ million. ​(Round to one decimal​ place.)

Answer 1

Cost of rebate = number of vehicles sold * rebate per vehicle

Cost of rebate = 53,200 * $1,800 = $95,760,000, or $95.8 million

Incremental profit = increase in sales units * profit margin per vehicle with rebate

Incremental profit = (53,200 - 38,400) * $6,880 = $101,824,000, or $101.8 million

Yes, it is a good idea because the incremental profit is higher than the cost of rebate