Question

1.) Honda Motor Company is considering offering a $2,000 rebate on its minivan, lowering the vehicle's price from $30,000 to $28,000. The marketing group estimatesthat this rebate will increase sales over the next year from 40,000 to 50,000 vehicles. Suppose Honda's profit margin with the rebate is $6,000 per vehicle. If thechange in sales is the only consequence of this decision, what is the cost of the rebate (in millions of dollars)?2.)What is the benefit (in millions of dollars)?Note: Please show how to calculate, I know it's simple but I can't remember.

Answer 1

1. what is the cost of the rebate (in millions of dollars)?
Rebate per van is $2000. Rebate increases sales from 40000 to 50000 vans ie by 10000 vans.
So Total rebate is 10000*$2000 = $20,000,000 = $20M
SO Cost of Rebate is $20M

2.)What is the benefit (in millions of dollars)
Benefit is inremental sales of 10,000 vans with profit margin of $6000 each
So Total incremental profit = 10,000*$6,000 = $60M
Since profit margin of $6000 is after rebate, net benefit of rebate is $60M extra profit