Honda Motor Company is considering offering a $ 1 comma 800 rebate on its minivan, lowering the vehicle's price from $ 30 comma 500 to $ 28 comma 700. The marketing group estimates that this rebate will increase sales over the next year from 40 comma 200 to 54 comma 600 vehicles. Suppose Honda's profit margin with the rebate is $ 6 comma 500 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.

As the benefit of offering the rebate is $21,240,000 ($93,600,000 - $72,360,000) higher than the cost of rebate, the opportunity is beneficial for the company.

Explanation:

Here, the rebate offering of considered as an opportunity to increase the profits. The rebate given in the question is $1800.

1. Cost of the Opportunity:

The cost of the rebate offering = 40,200 Units * $1,800 per unit

The cost of the rebate offering = $72,360,000

2. Benefit of the Opportunity:

The benefit of the opportunity = (Additional Units sold * Profit without rebate)

Here,

Additional units sold are 14,400 Units (54,600 - 40,200).

Profit Margin with rebate is $6500

Now, by putting values, we have:

The benefit of the opportunity = 14,400 Units * $6,500 = $93,600,000

As the benefit of offering the rebate is $21,240,000 ($93,600,000 - $72,360,000) higher than the cost of rebate, the opportunity is beneficial for the company.

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