Question

The following question requires you do a simple cost-benefit analysis:

Honda Motor Company is considering offering a $2000 rebate on its minivan.

The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose Honda’s gross profit after the rebate is $6000 per vehicle.

And, suppose the change in sales is the only consequence of this decision.

[1] What is the (opportunity) cost of doing the rebate?

[2] What is the benefit (or total gross profits) of doing the rebate?

A. [1] is 330 million; [2] is 320 million

B. [1] is 320 million; [2] is 240 million

C. [1] is 320 million; [2] is 330 million

D. [1] is 240 million; [2] is 330 million

Answer 1

Solution:

Rebate offered on Minivan:  $2000 Per minivan.

Old Sale : 40,000 Vehicles, New Sale : 55,000 Vehicles.

Gross profit after the rebate : $6000 per vehicle.

Gross Profit before rebate : Gross Profit after rebate + Rebate

Gross Profit before rebate : $ 6000 + $ 2000 = $ 8000

[1] Opportunity Cost of doing the rebate : Old Sale * GP before rebate

Opportunity Cost of doing the rebate : 40,000 * * $8,000= 320,000,000 or 320 Million

[2] Benefit (or total gross profits) of doing the rebate : New Sale * GP before rebate

Benefit (or total gross profits) of doing the rebate : 55,000 * $ 6,000 = 330,000,000 or 330 Million

Therefore , "Option C" is the correct answer i.e. [1] is 320 million; [2] is 330 million

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