Question

1.

Honda Motor Company is considering offering a $2,100 rebate on its minivan, lowering the vehicle's price from $30,300 to $28,200. The marketing group estimates that this rebate will increase sales over the next year from 41,600 to 54,100 vehicles. Suppose Honda's profit margin with the rebate is $5,940 per vehicle. If the change in sales is the only consequence of this decision, what are its costs and benefits? ls it a good idea? Hint: View this question in terms of incremental profits. The cost of the rebate will be Smillion. (Round to one decimal place.)

2.

Answer 1

Answer (1):

Profit (if rebate given) = $5940 per vehicle * 54100 vehicle = $321,354,000

Profit (if no rebate given) = ($5940 + $2100)per vehicle * 41600 vehicle = $334,464,000

Increase/(decrease) in Profit due to Rebate = $321,354,000 - $334,464,000 = ($13,110,000)

Hence, the idea of rebate is not good.

Answer (2):

Market Value of Stock of company = $62.52 per stock * 100 stock = $6252
Cash Bonus = $5100

Value of Stock bonus (if Stock is free to trade) = $6252 - $5100 = $1152

If Stock is free to trade then, Bonus in the form of Stock should be selected since, it gives net benefit of $1152.

If Stock is required to hold for one year then decision will depends on, probability of market price of stock after one year if it is favorable then Stock bonus will be selected and if it is not favorable then cash bonus is selected.

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