Honda is considering bringing its new Honda NBox it makes for the Japanese marke

Question

Honda is considering bringing its new Honda NBox it makes for the Japanese market to the United States. Its closest competitor would be Daimler’s Smart car, which made a profit of $108.3 million on sales of $10.7 billion in the United States last year. Smart cars sell for around $13,000 but seat only two people. In comparison, Honda’s NBox holds four people and would be priced at $16,000, making it an alternative for small-car-minded families. The unit variable cost for each NBox is $14,000 and Honda has fixed costs totaling $20 million for this car. (Please show ALL your work on each question.)

A) What is the profit margin for the Smart car?

B) How many NBox cars must Honda sell to break even?

C) How many NBox cars must Honda sell to realize a profit margin similar to that of the Smart car?

Explanation / Answer

1. Profit margin = profits/sales

=$108.3million/$10.7billion

=0.01 or 1%

2.Breakeven volume =Fixed cost/(price-variable cost)

=$20,000,000/($16,000-$14,000)

=10,000 cars

3.The profit margin found for the Smart car was 1%.To determine the unit volume necessary to achive this goal, we incorporate the profit goal into the unit contribution as an additional variable cost. Look at it is this way : If 1% of each sale must go toword profits, that leaves only 99% of selling price to cover fixed costs. thus the equation becomes:

Unit volume =fixed cost/ [price-variable cost-(0.01*price) or fixed cost/(0.99*price)-variable cost

So,

Unit volume=$20,000,000/[(0.99*16,000)-$14000]

   =10869.56 cars

There fore ,to realize a 1% profit margin ,honda would have to sell 10879 cars.

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