Honda Motor Company is considering offering a $2,100 rebate on its minivan, lowering the vehicle's price from $29,700 to $27,600. The marketing group estimates that this rebate will increase sales over the next year from 42,000 to 55,400 vehicles. Suppose Honda's profit margin with the rebate is $6,600 per vehicle. If the change in sales is the only consequence of this decision
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Honda Motor Company is considering offering a
rebate on its minivan, lowering the vehicle's price from
to
The marketing group estimates that this rebate will increase sales over the next year from
to
vehicles. Suppose Honda's profit margin with the rebate is
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.
Answer -
Incremental revenuer efers to the additional revenue generated from an additional quantity of sales. It can be used to determine the additional revenue generated by a certain product, investment or direct sale from a marketing campaign when the quantity of sales has grown.
A baseline revenue level is established, and it is measured on the basis of this baseline revenue
Incremental revenue is often compared to the cost of a product.
Here in the given situation, the only benefit of the rebate is that Honda will sell more vehicles then existing situation and earn more profit on each additional vehicle sold.
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