Heavy Duty Company, a Manufacturer of Power Tools, Decides to Offer

question 97

Multiple Choice

Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Duty's marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one?

• A) No, since costs are $7,800,000 more than benefits.
• B) No, since costs are $6,800,000 more than benefits.
• C) Yes, since the benefits are $3,400,000 more than the costs.
• D) Yes, since the benefits are $7,300,000 more than the costs.

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Definitions:

Replacement Cost

Cost to replace a firm’s assets. Also called reproduction cost.

Economic Income

The sum of a company's net cash flow and the change in present value of a company's cash flows in a given period.

ROA

Return on Assets, a financial ratio indicating the profitability of a company relative to its total assets.

Capital Structure

The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity, which is used to finance its overall operations and growth.