Figure 14-1 Assume That Lexus (L)is the First Automobile Company to Produce

question 193

Multiple Choice

Figure 14-1

Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche.
-Refer to Figure 14-1.Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market?

• A)In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters.
• B)No, it should keep the same price and work to capitalize on its brand loyalty.
• C)Yes, it will drive BMW out of the market.
• D)No, because BMW will enter the market regardless of Lexus' decision about its price.

---

Definitions:

7-year Property

Assets, such as machinery and equipment, used in a business, deemed to have a depreciable life of 7 years for tax purposes.

Bonus Depreciation

An additional amount of depreciation that can be claimed in the first year of ownership of business assets, accelerating tax benefits.

AMT Purposes

Pertains to the Alternative Minimum Tax, a parallel tax system designed to ensure that individuals and corporations with substantial exemptions or deductions pay at least a minimum amount of tax.

Long-term Contracts

Agreements that span a lengthy period, typically over one year, often related to construction or large projects.