Chap 012

Chapter 12 PRICING PRODUCTS AND SERVICES Test Item Table
Major Section of the Chapter Level 1: Definition (Knows Basic Terms & Facts) Where Dot-Coms Still Thrive (pp. 257-258) Nature and Importance of Price (pp. 258-260) General Pricing Approaches (pp. 260-265) Estimating Demand and Revenue (pp. 265-267) Determining Cost, Volume, and Profit Relationships (pp. 268-270) Pricing Objectives and Constraints (pp. 270-272) Setting A Final Price (pp. 273-276) Video Case: Washburn International (pp. 278-279) Note: Bold numbers indicate short essay questions. Level of Learning Level 2: Conceptual (Understands Concepts & Principles) 1, 2 Level 3: Application (Applies Principles)
3, 5, 7, 8, 9, 11, 12, 13, 17, 18, 19, 206 22, 23, 29, 35, 41, 44, 45, 48, 54, 57, 58, 61, 64, 67, 69, 72, 73, 80 84, 85, 87, 88, 95
4, 14, 205, 207, 208
6, 10, 15, 16, 20
21, 24, 26, 28, 31, 32, 33, 40, 42, 43, 46, 47, 49, 53, 56, 63, 70, 71, 75, 79, 81, 209, 210 83, 86, 91, 92, 94, 99, 100, 101, 211, 212, 213 107, 109, 134
25, 27, 30, 34, 36, 37, 38, 39, 50, 51, 52, 55, 59, 60, 62, 65, 66, 68, 74, 76, 77, 78, 82 89, 90, 93, 96, 97, 98, 102, 103
104, 105, 106, 110, 111, 130, 131, 132, 133, 214 135, 141, 146, 147, 156, 157, 161, 165, 167, 216 172, 174, 176, 179, 180, 188, 193, 194, 197, 199, 201, 218, 219, 220
108, 112, 113, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 215 142, 145, 151, 152, 159, 160, 162, 163, 164, 166, 168 171, 177, 182, 183, 186, 189, 190, 191, 192, 198 203, 204
136, 137, 138, 139, 140, 143, 144, 148, 149, 150,153, 154, 155, 158, 217 169, 170, 173, 175, 178, 181, 184, 185, 187, 195, 196, 200, 221 202,
CHAPTER 12 PRICING PRODUCTS AND SERVICES MULTIPLE CHOICE QUESTIONS

12-1 CHAPTER OPENING EXAMPLE What do Expedia, Travelocity, and Priceline have in common? a. b. c. d. e. They are three websites that use the same Internet service provider (ISP). They are companies that use reverse auctions to sell their merchandise. They are three online websites that only sell to businesses. They are all franchise operations that operate in the business-to-business market only. They are the three leading online travel websites. CONCEPTUAL
Answer: e Page: 257 Rationale: These three websites book airline tickets, hotel rooms, and special travel packages for travelers. 12-2 CHAPTER OPENING EXAMPLE CONCEPTUAL
Online travel websites have not experienced the same problems as other dot-com companies because these websites: a. b. c. d. e. rarely attempt to establish any type of long-term relationships with customers. focus on market share. use tactical objectives instead of strategic objectives. allow customers to save money and time. create form utility for customers.
Answer: d Page: 257 Rationale: Like any company, online travel sites must establish marketing relationships with customers. Travel companies have beaten the dot-com odds by providing two key benefits to customers: saving money and time. 12-3 PRICE College tuitions, initiation fees, bus fares, and club dues are all: a. b. c. d. e. premiums. bartering tools. mediums of exchange. synonyms for price. examples of liquidity. DEFINITION
Answer: d Page: 258 Rationale: Key term definitionprice
12-4 PRICE Which of the following is a price? a. b. c. d. e. operating costs liquidity equitable medium college tuition stockholders' equity
CONCEPTUAL
Answer: d Page: 258 Rationale: College tuition is the money paid by a college student for a term of classes or the price of the education. 12-5 PRICE DEFINITION
From a marketing viewpoint, price is __________ exchanged for the ownership or use of a good or service. a. b. c. d. e. money or other considerations (including goods but not intangibles and services) money or other considerations (including other goods and services) money exclusively earmarked for the transaction what is recognized as barter within a particular culture anything of value to the buyer but not necessarily of value to the seller
Answer: b Page: 258 Rationale: Key term definitionprice 12-6 PRICE APPLICATION
Patty O'Rourke hired an attorney to represent her in a court case involving an auto accident. The attorney charged O'Rourke a fee for his services. Terry Thomas needed a haircut--the local stylist charged him $12 for her services. Aaron Mathison mowed his neighbor's lawn; in exchange, the neighbor roto-tilled Mathison's garden. The attorney fees paid by O'Rourke, the $12 charged by the hair stylist, and exchange of lawn mowing for garden tilling are examples of: a. b. c. d. e. price. barter. fee setting. unfair market exchanges. product fares.
Answer: a Page: 258 Rationale: In the marketing realm, price is the money, goods, or services exchanged for the ownership or use of a good or service. Just as a customer pays a specific monetary price for physical product like a loaf of bread or a box of cereal, the price of a haircut service might be $12. The price of getting one's garden roto-tilled might take the form of barterwhere, in exchange for one service or product no money changes hands, but the parties exchange services or goods.
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12-7 BARTER
DEFINITION
Barter is the practice of exchanging goods and services for other goods and services rather than for: a. b. c. d. e. value. perceptions. money. promises. tariffs.
Answer: c Page: 258 Rationale: Text term definitionbarter 12-8 BARTER DEFINITION
The practice of exchanging goods and services for other goods and services rather than for money is called: a. b. c. d. e. pricing. pricing substitution. debt restructuring. value-pricing. barter.
Answer: e Page: 258 Other Location: web Rationale: Text term definitionbarter 12-9 PRICE EQUATION DEFINITION
The price equation formula is price equals list price minus discounts and allowances plus: a. b. c. d. e. salaries. commissions. trade-ins. extra fees. taxes.
Answer: d Page: 259; Figure 12-1 Rationale: The price equation formula is price equals list price minus discounts and allowances plus extra fees.
12-10 PRICE EQUATION
APPLICATION
A company that manages apartments decides to buy 17 new dishwashers at a list price of $750, each as replacements for old dishwashers in a small apartment complex it owns. Because the company is buying more than 10 dishwashers, it is eligible for a $150 per unit quantity discount. Financing charges total $20 per unit. The company gets $10 per dishwasher for the 17 dishwashers traded in. What is the actual price the company will pay for each dishwasher? a. b. c. d. e. $590 $600 $610 $730 $760
Answer: c Page: 259 Rationale: Using the price equation. Price = List price - Discounts and allowances + Extra Fees= $750 - ($150 quantity discount + $10 trade in) + $20 financing= 750 - (150 + 10) + 20= $610 12-11 VALUE The ratio of perceived benefits to price is called: a. b. c. d. e. the price-quality relationship. prestige pricing. value-added pricing. value. value analysis. DEFINITION
Answer: d Page: 259 Rationale: At a given price, as perceived benefits increase, value increases. Thus, value = perceived benefits divided by perceived price. 12-12 VALUE-PRICING Value-pricing is: a. b. c. d. e. the ratio of perceived benefits to price. the practice of increasing a products benefits while maintaining or decreasing price. the practice of simultaneously increasing product and service benefits and increasing price. the ratio of price to perceived benefits. list price minus discounts and allowances plus extra fees. DEFINITION
Answer: b Page: 259 Rationale: Text term definitionvalue-pricing
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12-13 VALUE-PRICING
DEFINITION
Creative marketers engage in __________, the practice of simultaneously increasing product and service benefits and maintaining or decreasing price. a. b. c. d. e. revenue sharing diminishing returns quantitative analysis value-pricing cost-plusing
Answer: d Page: 259 Other Location: web Rationale: Text term definitionvalue-pricing 12-14 PRICE/VALUE CONCEPTUAL
Most consumers realize the quality of diamonds varies, and most believe the higher the price of the diamond, the higher its quality. This is an example of price influencing the perception of overall quality, and __________ to consumers. a. b. c. d. e. acceptable cost perceptual investment barter potential return on investment value
Answer: e Page: 259 Rationale: For some products, price influences the perception of overall quality, and ultimately value, to consumers.
12-15 PRICE/VALUE
APPLICATION
Katherine was shopping for a new pair of sunglasses. While in the Marshall Field's department store in the shopping center, Katherine visited the optical department. Here she found a pair of Oakley brand sunglasses that she considered very attractive. However, the price of $225 was more than she expected to pay for sunglasses and asked the salesperson why the glasses carried such a high price tag. The salesperson informed Katherine that the $225 ensured her of the finest quality glasses featuring ultra-strong titanium frames and specially formulated lenses, which would protect Katherine from all harmful UV and blue light. Finally, the lenses would offer optimum optical clarity, and the glasses would look great on Katherine. The salesperson was attempting to help Katherine realize the value offered by the Oakley glasses by: a. b. c. d. e. comparing the features of the glasses to those of other glasses. comparing the perceived benefits of the glasses to the price of the glasses. creating a value analysis for Katherine. creating a price/cost/benefit equation. comparing the technology of the glasses to the price of the glasses.
Answer: b Page: 259 Rationale: Value is defined as the ratio of perceived benefits to price: Value = Perceived Benefits/Price. The salesperson was attempting to convince Katherine that the price of the sunglasses was reasonable due to the many benefits offered by the product: superior strength and optical clarity, protection from harmful rays, and fashion. 12-16 PRICE/VALUE APPLICATION
When Pizza Hut announced it was add going to 25 percent more toppings to its Lover's Line of pizzas without increasing the price, what consumer motivation was it appealing to? a. b. c. d. e. cost appearance reliability value prestige
Answer: d Page: 259 Rationale: By offering more toppings for the same price, Pizza Hut was helping customers to compare perceived benefits to price, the value of the pizza offering.
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12-17 PROFIT EQUATION
DEFINITION
To calculate __________, you would compute: (unit price x quantity sold) - total cost. a. b. c. d. e. total revenue profit marginal revenue average revenue break-even point
Answer: b Page: 260 Rationale: Key term definitionprofit equation 12-18 PROFIT EQUATION A firm's profit equation demonstrates that its profit equals: a. b. c. d. e. total cost + total revenue. total revenue - total cost. total cost - marginal cost. total cost - variable cost. total revenue x total cost. DEFINITION
Answer: b Page: 260 Rationale: Key term definitionprofit equation 12-19 PROFIT EQUATION According to the profit equation, profit equals total revenue minus: a. b. c. d. e. marginal cost. discounts and allowances. total cost. variable cost. fixed cost. DEFINITION
Answer: c Page: 260 Other Location: web Rationale: Key term definitionprofit equation
12-20 PROFIT EQUATION
APPLICATION
Ships Ahoy is a small company that makes model sailboat kits priced at $120 each. (There is no quantity discount.) The costs of the materials that go into each kit are $45. It costs $5 in labor to assemble a kit. The company has monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising in sailing and hobby magazines, and $3,500 for the monthly salary of its owner. If Ships Ahoy sells 150 kits in a given month, its monthly profit will be: a. b. c. d. e. $5,300. $10,500. $12,700. $12,800. $15,700.
Answer: a Page: 260 Rationale: Profit = total revenue - total cost = (unit price x quantity sold) - (fixed cost + variable cost) = $18,000 ($5,200 + $7,500) = $5,300. The variable cost is the labor and materials for each kit ($5 + $45) times the number of kits sold (150 kits) or $50 x 150 = $7,500. The fixed costs are $1000 rent and insurance, $200 for heat and electricity, $500 for advertising, and $3,500 salary for the owner ($5,200 total).The profit is $18,000-$12,700 or $5,300 for the month. 12-21 DEMAND-ORIENTED APPROACHES Which of the following is NOT a demand-oriented approach to pricing? a. b. c. d. e. prestige pricing bundle pricing odd-even pricing penetration pricing customary pricing CONCEPTUAL
Answer: e Page: 260 Rationale: Customary pricing is a competition-oriented approach to pricing. 12-22 SKIMMING PRICING DEFINITION
Setting the highest initial price that customers really desiring the product are willing to pay is: a. b. c. d. e. skimming pricing. penetration pricing. price lining. odd-even pricing. prestige pricing.
Answer: a Page: 260 Rationale: Text term definitionskimming pricing
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12-23 SKIMMING PRICING Skimming pricing is a strategy that introduces a new or innovative product by: a. b. c. d. e. setting the price 10 percent below its nearest competitor. determining if the product is supply inelastic. creating a product image that appeals to fiscally-conservative consumers. setting a high initial price. setting a low initial price.
DEFINITION
Answer: d Page: 260 Rationale: Text term definitionskimming pricing 12-24 SKIMMING PRICING A skimming pricing policy is likely to be most effective when: a. b. c. d. e. consumers perceive your product to be similar to other products on the market. a lower price will have a major effect on reducing unit costs. competitors will be attracted to the market due to the potential for high sales revenues. consumers tend to be price sensitive. none of the above is true. CONCEPTUAL
Answer: e Page: 260 Other Location: web Rationale: A skimming pricing strategy, which entails setting a high initial price, is most effective when customers are willing to buy immediately at the high initial price. One reason for this behavior would be that the consumer perceives the product as unique, not similar to other products on the market. Skimming pricing is selling at a higher, not a lower initial cost. So while alternative b may be correct (Lowering the price may reduce costs if so much more can be sold that the firm has experience curve effects and can lower prices because they have learned how to make the product at a reduced cost.) it does not apply to skimming pricing. Because competitors will be attracted due to the potential for high sales revenues, this will not be effective for the firm practicing skimming pricing. If consumers are price sensitive, then they will not pay the higher prices and there will be little demand. Thus none of the suggested alternatives are correct.
12-25 SKIMMING PRICING
APPLICATION
Hallmark was the official supplier of flowers at the last Winter Olympics. Hallmark presented each Olympic winner with a special bouquet of roses designed to resemble the Olympic torch. Consumers can buy a smaller version of this same bouquet at the Hallmark website for $74.95. The Olympic bouquet that consumers can buy contains two dozen yellow roses, yet you can buy two dozen yellow roses for less than $35 at most supermarkets. If Hallmark is treating the Olympic bouquet as an innovative product, then it is using which demand-oriented approach to pricing? a. b. c. d. e. bundle pricing yield management pricing skimming pricing target return-on-sales pricing penetration pricing
Answer: c Page: 260 Rationale: Skimming pricing is appropriate when there are enough prospective customers who are willing to buy the product immediately at the high price, the high initial price will not attract competitors, and customers interpret the high price as signifying high quality (playing off the prestige associated with the Olympics). 12-26 SKIMMING PRICING CONCEPTUAL
The manufacturer of a DVD-RW, a recordable DVD disk that can be erased and reused, is thinking of using a skimming pricing strategy for its new product. Which of the following conditions would argue AGAINST using a skimming pricing strategy for the DVD-RW disks? a. b. c. d. e. large potential market, even at a high price technological problems still exist for competitors increasing volume reduces production costs substantially consumers perceive a price-quality relationship all of the above
Answer: c Page: 260 Rationale: Production economies of scale and experience curve effects favor high production-and, hence, a penetration strategy, not a skimming strategy.
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12-27 SKIMMING PRICING
APPLICATION
For precision shooting competitions, Leupold & Thomas, U.S. manufacturers of rifle scopes, introduced a revolutionary new patented optical system. Competitions are won by hundredths of an inch, so the image seen through the scope is crucial. That's why the Leupold rifle scope with its new optical system is designed to offer an image that is crisp, sharp, flat and second to none in image contrast. The initial price of the Competition Series scope will be $1,605.40. Which pricing strategy will best attract price-insensitive customers and help Leupold & Stevens recoup its research and development costs? a. b. c. d. e. price lining experience curve pricing customary pricing skimming pricing target pricing
Answer: d Page: 260 Rationale: The conditions favoring skimming pricing are most likely to exist when a new product is protected by patent or copyright or its uniqueness is understood and appreciated by customers. 12-28 SKIMMING PRICING CONCEPTUAL
When microwave ovens were in the introduction stage of the product life cycle, some consumers were willing to pay exorbitant prices for the innovative ovens. Taking advantage of this strong consumer desire, marketers set the price for microwave ovens at the highest initial price that customers with a very strong desire for the product were willing to pay. Marketers of microwave ovens were using a __________ pricing strategy. a. b. c. d. e. skimming penetration prestige price lining bundle
Answer: a Page: 260 Rationale: Skimming pricing is setting the highest initial price that customers really desiring the product are willing to pay. Skimming pricing strategies are used for new, innovative products that are highly sought after by a significant number of customers. Such customers are relatively insensitive to price because of the product's ability to satisfy their needs and wants in relation to alternative products.
12-29 PENETRATION PRICING
DEFINITION
A company that sets a low initial price on a new product to appeal immediately to the mass market is using: a. b. c. d. e. skimming pricing. penetration pricing. price lining. odd-even pricing. prestige pricing.
Answer: b Page: 260 Rationale: Text term definitionpenetration pricing 12-30 PENETRATION PRICING APPLICATION
Leupold & Stevens, Inc. makes Leupold scopes for rifles and has introduced a new scope that has the quality and performance for which Leupold & Stevens is famous at a price much lower than it has ever sold a rifle scope before. The new scope offers several different magnifications and is the only scope in the $200 range that is made in the United States. Which pricing strategy is Leupold & Stevens using to appeal to a larger market? a. b. c. d. e. skimming pricing penetration pricing price lining odd-even pricing demand-backward pricing
Answer: b Page: 260 Rationale: Penetration pricing is setting a low initial price on a new product to appeal immediately to the mass market. 12-31 PENETRATION PRICING Penetration pricing is intended to appeal to which market? a. b. c. d. e. highly selective quality-seeking consumers price-insensitive markets the mass market specialty goods markets the same markets as skimming pricing CONCEPTUAL
Answer: c Page: 260 Rationale: Penetration pricing is setting a low initial price on a new product to appeal immediately to the mass market.
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12-32 PENETRATION PRICING Which of the following statements about penetration pricing is true? a. b. c. d. e.
CONCEPTUAL
Penetration pricing is a profit-oriented approach to pricing. Penetration pricing is a cost-based pricing method. Penetration pricing encourages competitors to enter a market. A penetration pricing strategy is more effective in a marketplace with price-sensitive consumers. Because penetration pricing is a high initial-price strategy, it will not attract competitors.
Answer: d Page: 260 Rationale: Penetration pricing is setting a low initial price on a new product to appeal to a mass market, which is price-sensitive. 12-33 PENETRATION PRICING CONCEPTUAL
When Hallmark cards introduced a line of $.99 cards (about half the price of the previously least expensive cards sold by Hallmark), the greeting card company was trying to appeal to a mass market that was price sensitive. Hallmark was using a __________ pricing strategy. a. b. c. d. e. prestige skimming penetration demand-backward experience-curve
Answer: c Page: 260 Rationale: Penetration pricing is the setting of a low initial price on a new product (inexpensive greeting cards) to appeal immediately to the mass market. 12-34 PENETRATION PRICING APPLICATION
The manufacturer of a new kind of fat-free ice cream that has the consistency and taste of regular ice cream is thinking of using a skimming pricing strategy for its new product. Which of the following conditions would suggest using a skimming pricing strategy for the tasty fat-free ice cream? a. b. c. d. e. The ice cream market is highly conservative. A large portion of the market has inelastic demand for ice creamover a fairly broad range of prices. Economies of scale in production are substantial. Retailers are willing to pay for new brands of premium ice cream in an extremely overcrowded category. Once the initial price is set, it is nearly impossible to lower price because of the possibility of alienating early buyers.
Answer: b Page: 260 Rationale: Inelastic demand would result in small sales increases due to lower price, in which case a skimming strategy would be best.
12-35 PRESTIGE PRICING
DEFINITION
A manufacturer using __________ is setting a high price so that status-conscious consumers will be attracted to the product and buy it. a. b. c. d. e. skimming pricing. penetration pricing. price lining. odd-even pricing. prestige pricing.
Answer: e Page: 261 Rationale: Text term definitionprestige pricing 12-36 PRESTIGE PRICING APPLICATION
The Hummer is an attention-getting SUV that sold for $80,000 in a limited number of outlets. Then, General Motors proved the smaller version for $50,000 could be sold in many more outlets. To cover costs and reach the market faster, the Hummer 2 shared some parts with other GM cars. To which customer effects did Hummer marketing managers need to pay particular attention? a. b. c. d. e. The original Hummer is prestige priced; therefore, the price of Hummer 2 should make sense to customers and reflect differences in the perceived value of the products offered. High gas mileage will be important for Hummer 2. Color choices will be important for Hummer 2. Comfort and space for families will be important for Hummer 2. The original Hummer was penetration priced, so that the Hummer 2 continues this pricing strategy to maximize expected profit.
Answer: a Page: 261 Rationale: The challenge will be to deliver a Hummer for a lower price that will not lead customers to become dubious about quality and prestige and buy fewer vehicles. In this market, at either price point, customers are not buying the vehicle for its gas mileage or color or as family transport. Clearly, the original was not penetration (low) priced.
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APPLICATION
Chico's sells women's sportswear. A simple tank top with the Chico's label costs $48. If you know you simply want a tank top, you can buy a tank top for $5 at a Family Dollar Store, but it won't have the Chico's label. What kind of demand-oriented approach to pricing is being used by this manufacturer? a. b. c. d. e. experience curve pricing target market share pricing demand-backward pricing prestige pricing flexible pricing
Answer: d Page: 261 Other Location: web Rationale: Prestige pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it. Chico's is obviously hoping to attract that market. 12-38 PRESTIGE PRICING APPLICATION
Bijan's in New York City has offered a five-piece set of crocodile luggage for $55,000. This is an example of __________ pricing. a. b. c. d. e. penetration prestige odd-even experience curve loss-leader
Answer: b Page: 261 Rationale: Prestige pricing involves setting a high price so the quality- or status-conscious consumers will be attracted to the product and buy it. 12-39 PRESTIGE PRICING APPLICATION
You can buy a General Electric dishwasher for $399, or you can buy a similar sized under-thecounter Bosch brand dishwasher for $989. Since Bosch uses its pricing strategy to project a product image, it is most likely using __________ pricing. a. b. c. d. e. bait and switch standard markup prestige penetration cost plus fixed-fee
Answer: c Page: 261 Rationale: Prestige pricing involves setting a high price so that quality- or status-conscious consumers will be attracted to the product and buy it. This would be the situation with the Bosch dishwasher since it is trying to convey a status image.
CONCEPTUAL
The demand curve for which type of pricing method slopes downward and to the right, then turns back to the left? a. b. c. d. e. skimming pricing penetration pricing price lining demand-backward pricing prestige pricing
Answer: e Page: 261 Rationale: Prestige pricing involves setting a high price so that status-conscious consumers will be attracted to the product and buy it. The demand curve slopes downward and to the right, but turns back to the left when the price goes low enough to lose the ability to suggest status. In the case of a prestige pricing demand curve, the lower the price is set beyond the bend in the curve, the less product will be sold. 12-41 ODD-EVEN PRICING Odd-even pricing is: a. b. c. d. e. setting prices one way for product lines and another way for individual brands. setting prices of luxury items at even price points and setting the price of necessities at odd price points. setting prices a few dollars or cents under an even number. a method of pricing where price often falls following the reduction of costs associated with the firm's production experience. adding a fixed percentage to the cost of all items in a specific product class. DEFINITION
Answer: c Page: 261 Rationale: Text term definitionodd-even pricing 12-42 ODD-EVEN PRICING Odd-even pricing is most closely related to: a. b. c. d. e. retailers' perceptions of price. customers' perceptions of price. wholesalers' markups. manufacturers' costs. cost of product facilitation to market. CONCEPTUAL
Answer: b Page: 261 Rationale: Odd-even pricing involves setting price a few dollars or cents under an even number. For example, customers see an item priced at $4.99 as "something over $4.00" rather than "about $5.00." The customers' perception of price is the influential factor.
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12-43 ODD-EVEN PRICING
CONCEPTUAL
The prices for all fruit trees sold in Stark Bros. fruit trees and landscaping catalog end in $.99. Stark Bros. uses: a. b. c. d. e. odd-even pricing. dynamic pricing. price lining. bundle pricing. experience curve pricing.
Answer: a Page: 261 Other Location: web Rationale: Odd-even pricing involves setting prices a few dollars or cents under an even number. 12-44 TARGET PRICING DEFINITION
__________ is a method of setting price by estimating the price consumers would be willing to pay for the item and then working backward to assure necessary margins for the retailers and wholesalers. a. b. c. d. e. Penetration pricing Price lining Cost plus percentage-of-cost pricing Cost plus fixed fee pricing Target pricing
Answer: e Page: 261 Rationale: This involves setting price by estimating the price consumers would be willing to pay, and then working backward through margins for intermediaries to determine the price to charge. This often results in deliberate adjustment of the quality of component parts to achieve the target price. 12-45 TARGET PRICING DEFINITION
Target pricing is the result of a manufacturer __________ in a product to achieve the target price. a. b. c. d. e. setting the highest costs possible deliberately adjusting the cost and quality of the component parts researching what mark-ups wholesalers will accept studying competitive prices and making fixed-cost adjustments relying on a jury of executive opinion to establish cost factors
Answer: b Page: 261 Rationale: Text term definitiontarget pricing
12-46 TARGET PRICING
CONCEPTUAL
The Swedish manufacturer of Asko dishwashers concluded that consumers would be willing to pay approximately $989 for a dishwasher that was quieter than any other machine on the market. Based on this price, Asko determined the margins that would have to be allowed for wholesalers and retailers to give the $989 retail price. Asko used: a. b. c. d. e. prestige pricing. price lining. cost-plus pricing. target pricing. customary pricing..
Answer: d Page: 261 Rationale: Target pricing is setting a price by estimating the price consumers would be willing to pay for the product, then working backward through margins for retailers and wholesalers to determine what price they can charge wholesalers for the product. To do this, the manufacturer deliberately adjusts the composition and features of a product to achieve the target price to consumers. 12-47 TARGET PRICING CONCEPTUAL
Which of the following pricing techniques is most sensitive to customers' responses to price? a. b. c. d. e. cost-plus-percentage-of-cost pricing experience curve pricing cost plus fixed fee pricing target pricing standard markup pricing
Answer: d Page: 261 Rationale: Alternatives a, b, c, and e are cost-oriented approaches, so consumer demand is irrelevant. Target pricing is demand-based and focused on what consumers are willing to pay. 12-48 BUNDLE PRICING DEFINITION
__________ is the marketing of two or more products for a single "package" price. a. b. c. d. e. Packaged pricing Loss-leader pricing Bundle pricing Tie-in pricing Multi-product pricing
Answer: c Page: 261 Rationale: Text term definitionbundle pricing
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12-49 BUNDLE PRICING
CONCEPTUAL
If you were to buy five dwarf peach trees from the Stark Bros. fruit trees and landscaping catalog in five separate orders, you will pay $108.99, but if you order its assortment (1 each of five different dwarf peach trees), you pay $89.99. In this example, Stark Bros. uses: a. b. c. d. e. standard markup pricing. bundle pricing. prestige pricing. price lining. demand-backward pricing.
Answer: b Page: 261 Rationale: This is an example of bundle pricing--the marketing of the five dwarf trees at a single "package" price. 12-50 BUNDLE PRICING APPLICATION
A computer retailer shrink-wraps Microsoft Works to his private label Pentium IV computer and sells the microcomputer and software for $2,500.00. This pricing scenario might best be described as: a. b. c. d. e. price lining. loss-leader pricing. customary pricing. prestige pricing. bundle pricing.
Answer: e Page: 261 Rationale: The retailer is marketing two products for a "package" price, which is the definition of bundle pricing. 12-51 BUNDLE PRICING APPLICATION
A bottle of shampoo shrink-wrapped with a bottle of conditioner for 10 cents more than the regular price of the shampoo is an example of __________ pricing. a. b. c. d. e. penetration prestige bundle odd-even standard mark-up
Answer: c Page: 261 Other Location: web Rationale: Bundle pricing is the marketing of two or more products at a single package price; this is the situation here.
12-52 MARKETING NEWSNET
APPLICATION
In response to Duracell's introduction of the Duracell Ultra battery, Energizer introduced an Advanced Formula battery, but unlike Duracell, Energizer priced its batteries at a low initial price to attract the mass market. Energizer used: a. b. c. d. e. penetration pricing. prestige pricing. skimming pricing. price lining. cost plus fixed fee pricing.
Answer: a Page: 262 Rationale: Penetration pricing is setting a low initial price of a new productthe strategy Energizer chose. 12-53 MARKETING NEWSNET CONCEPTUAL
In response to Duracell's introduction of the Duracell Ultra battery, Energizer introduced an Advanced Formula battery, but unlike Duracell, Energizer priced its batteries at a low initial price to attract the mass market. Was Energizer's strategy to steal market share from Duracell a success? a. b. c. d. e. No, because consumers equate quality of batteries with higher prices. No, because retailers did not respond appropriately to the target market pricing strategy. No, because consumers are price-insensitive when it comes to batteries. Yes, because consumers typically respond positively to cost-plus pricing. Yes, because the demand for batteries has unitary elasticity.
Answer: a Page: 262 Rationale: Answer a is what happened because with batteries consumers believe there is a price-quality relationship, which makes answers c and e incorrect. Answer b is incorrect because there is no indication Energizer set a target price and adjusted cost and quality components to maintain wholesaler and retailer margins. Answer d involves cost-oriented pricing, which is irrelevant here. 12-54 YIELD MANAGEMENT PRICING DEFINITION
__________ is charging different prices to maximize revenue for a set amount of capacity at any given time. a. b. c. d. e. Demand backward pricing Target pricing Yield management pricing Skimming pricing Penetration pricing
Answer: c Page: 262 Rationale: Text term definitionyield management pricing
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12-55 YIELD MANAGEMENT PRICING
APPLICATION
One problem in the interstate trucking industry is the number of trucks that return after making a delivery with an empty truck. There is a website where independent interstate truckers can look for loads that they can carry with them on their return trip. Because the trucks would be returning empty (and inefficiently), truckers, who use this website to get business that they would not have had without it, give a reduced shipping rate. This reduced rate is an example of: a. b. c. d. e. yield management pricing. penetration pricing. target pricing. cost plus pricing. odd-even pricing.
Answer: a Page: 262 Rationale: Yield management pricing is the charging of different prices to maximize revenue for a set amount of capacity at any given time. Yield management pricing benefits independent truckers because they can obtain some revenue from carrying loads in trucks that would otherwise be empty. In this case, the truckers are charging a lower price on the return trip than they did for the initial delivery to maximize the revenue for one truck over a round-trip. 12-56 COST-ORIENTED APPROACHES Which of the following statements about cost-oriented approaches is true? a. b. c. d. e. These methods focus on the demand side of the pricing problem and involve stimulating demand and decreasing revenue. These methods focus on the supply side of the pricing problem and involve considerations of production and marketing expenses. Target return on investment is an example of a cost-based method. Experience curve pricing is simple to use because costs predictably decrease by 25 percent with each doubling of production. Cost-oriented approaches are subcategories of competition-based methods so revenues are a critical factor. CONCEPTUAL
Answer: b Page: 262-263 Other Location: web Rationale: Cost-oriented approaches focus on the supply side of pricing. They focus on covering production costs, marketing costs, overhead, and profit. Target return on investment is a profit-based method. Costs do not always decrease by 25 percent with an experience curve effect. Cost-oriented approaches are not a subdivision of competition-based methods.
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12-57 STANDARD MARKUP PRICING Standard markup pricing: a. b. c. d. e.
DEFINITION
adjusts the price of a product so it is "in line" with that of its largest competitor. sets the price of a line of products at a number of different price points. adds a fixed percentage to the cost of all items in a specific product class. sets prices to achieve a profit that is a specified percentage of the sales volume. increases the price slightly to protect against undue profit losses from unforeseen environmental factors.
Answer: c Page: 263 Rationale: Text term definitionstandard markup pricing 12-58 STANDARD MARKUP PRICING DEFINITION
Which cost-based pricing method entails adding a fixed percentage to the cost of all items in a specific product class? a. b. c. d. e. experience curve pricing cost plus fixed-fee pricing demand backward pricing standard markup pricing target profit pricing
Answer: d Page: 263 Rationale: Text term definitionstandard markup pricing 12-59 STANDARD MARKUP PRICING APPLICATION
Woodsgift Farm sells floral jelliesjellies made from pansies, honeysuckle, wisteria, and other flowers. To price its jellies, the owners of the farm, add 30 percent to the cost of everything that goes into making the jellies including their salaries, jars, sugar, and pectin. What is this pricing method called? a. b. c. d. e. target return-on-sales pricing flexible pricing cost-plus-fixed-fee pricing standard markup pricing customary pricing
Answer: d Page: 263 Other Location: web Rationale: Standard markup pricing adds a fixed percentage to the cost of all items in a specific product classin this case, floral jellies.
12-60 STANDARD MARKUP PRICING
APPLICATION
Assume it costs Lady Marion Seafood, Inc. $30 to catch, process, freeze, package, and ship 5pound packages of Alaskan salmon. It uses a 60 percent markup on its salmon products and charges customers $48 for a postage-paid vacuum-sealed package of salmon. What type of pricing does Lady Marion Seafood use? a. b. c. d. e. target return-on-sales pricing cost-plus-fixed-fee pricing standard markup pricing target profit pricing customary pricing
Answer: c Page: 263 Rationale: Standard markup pricing adds a fixed percentage to the cost of all items in a specific product class (5-pound packages of salmon). 12-61 COST-PLUS PRICING DEFINITION
What type of pricing involves summing the total unit cost of providing a product or service and adding a specific amount to the cost to arrive at the price? a. b. c. d. e. standard markup pricing experience curve pricing cost-plus pricing penetration pricing bundle pricing
Answer: c Page: 263 Rationale: Text term definitioncost-plus pricing 12-62 COST-PLUS PRICING APPLICATION
Rather than billing clients by the hour, some lawyers and their clients agree on a fixed fee based on expected costs plus a profit for the law firm. Which pricing method are they using? a. b. c. d. e. target pricing cost-plus pricing customary pricing experience curve pricing bundle pricing
Answer: b Page: 263 Rationale: The rising cost of legal fees has prompted some law firms to adopt a cost-plus pricing approach.
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12-63 PROFIT-ORIENTED APPROACHES Which of the following is NOT a profit-oriented pricing method? a. b. c. d. e. target profit pricing below-market pricing target return on sales target return on investment All of the above are profit-oriented pricing methods.
CONCEPTUAL
Answer: b Page: 263 Rationale: Below-market pricing is a competition-oriented approach to pricing. 12-64 TARGET PROFIT PRICING Target profit pricing is: a. b. c. d. e. adjusting the price of a product so it is "in line" with that of its largest competitor. setting the price of a line of products at a number of different price points. adding a fixed percentage to the cost of all items in a specific product class. setting prices to achieve a profit that is a specified percentage of the sales volume. setting an annual target of a specific dollar amount of profit. DEFINITION
Answer: e Page: 263 Rationale: Text term definitiontarget profit pricing 12-65 TARGET PROFIT PRICING APPLICATION
A custom kitchen cabinet storeowner wishes to use target profit pricing to establish a price for a typical section of cabinets. Assume variable cost is $200 per unit, fixed cost is $44,000, and a target profit of $10,000 on a volume of 400 cabinets is desired? What should be charged for a typical cabinet section? a. b. c. d. e. $335.00 $310.00 $455.00 $398.00 cannot be determined from the information provided
Answer: a Page: 263 Rationale: Profit = total revenue - total cost. Profit = (P x Q) - [FC + (UVC x Q)]. Thus, $10,000 = 400P - [$44,000 + ($200 x 400)], or $335.00.
12-66 TARGET PROFIT PRICING
APPLICATION
Lady Marion Seafood, Inc. sells 5-pound packages of Alaska salmon. Assume its variable cost per package is $30, and its fixed cost is $250,000. It wants a target profit of $38,000 on a volume of 16,000 packages. What should it charge for a five-pound package of salmon? a. b. c. d. e. $25.00 $30.00 $40.00 $48.00 $55.00
Answer: d Page: 263 Rationale: Profit = total revenue - total cost. Profit = (P x Q) - [FC + (UVC x Q)]. Thus, $38,000 = 16,000P - [$250,000 + ($30 x 16,000] = $48. 12-67 TARGET RETURN-ON-SALES PRICING Target return-on-sales pricing is: a. b. c. d. e. adjusting the price of a product so it is "in line" with that of its largest competitor. setting the price of a line of products at a number of different price points. adding a fixed percentage to the cost of all items in a specific product class. setting prices to achieve a profit that is a specified percentage of the sales revenue. setting an annual target of a specific dollar amount of profit. DEFINITION
Answer: d Page: 264 Rationale: Text term definitiontarget return-on-sales pricing 12-68 TARGET RETURN-ON-SALES PRICING APPLICATION
A custom kitchen cabinet storeowner wishes to use target return-on-sales pricing to establish a price for a typical section of cabinets. Assume variable cost is $200 per unit, fixed cost is $44,000, and the storeowner desires a target profit of 20 percent of sales on an annual volume of 400 cabinets is desired. What price should be charged for a typical cabinet section? a. b. c. d. e. $372.00 $311.00 $445.50 $395.75 $387.50
Answer: e Page: 264 Rationale: Target return on sales = target profit / total revenue. TROS = P x Q - [FC + (UVC x Q)]/TR. 0.20 = 400P - [$44,000 + ($200 x 400)]/400P, or $387.50.
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12-69 TARGET RETURN-ON-INVESTMENT PRICING Target return-on-investment pricing is: a. b. c. d. e.
DEFINITION
setting the price of a line of products at a number of different price points. adding a fixed percentage to the cost of all items in a specific product class. setting prices to achieve a profit that is a specified percentage of the sales volume. setting prices to achieve a specified percentage return-on-investment. setting an annual target of a specific dollar amount of profit.
Answer: d Page: 264 Rationale: Text term definitiontarget return-on-investment pricing 12-70 TARGET RETURN-ON-INVESTMENT PRICING CONCEPTUAL
Which of the following companies would be most likely to use target return-on-investment pricing? a. b. c. d. e. a public utility a florist shop a book publisher a veterinarian a farmer
Answer: a Page: 264 Rationale: Target return-on-investment pricing is used by many utilities to satisfy reviews by public utility commissions to verify profits are reasonable, not exorbitant. 12-71 COMPETITION-ORIENTED APPROACH Which of the following is NOT a competition-oriented pricing approach? a. b. c. d. e. loss-leader pricing below-market pricing customary pricing above-market pricing penetration pricing CONCEPTUAL
Answer: e Page: 264 Rationale: Penetration pricing is a demand-oriented approach to pricing.
12-72 CUSTOMARY PRICING Customary pricing is: a. b. c. d. e.
DEFINITION
a pricing method where the price the seller quotes includes all transportation costs. setting the same price for similar customers who buy the same product and quantities under the same conditions. deliberately selling a product below its list price to attract attention to it. a method of pricing a product based on tradition, standardized channel of distribution, or other competitive factors. pricing based on what the market will bear.
Answer: d Page: 264 Rationale: Text term definitioncustomary pricing 12-73 CUSTOMARY PRICING DEFINITION
__________ is a competition-based method of pricing where tradition, a standardized channel of distribution, or other competitive factors dictate the price of a product. a. b. c. d. e. Standard markup pricing Cost-plus-percentage-of-cost pricing Customary pricing Experience curve pricing Target profit pricing
Answer: c Page: 264 Rationale: Text term definitioncustomary pricing 12-74 CUSTOMARY PRICING APPLICATION
Consumers buy candy bars, snacks, and soda pop from vending machines. Traditionally, the price of each of these products is about 75 cents. If a marketer charges a significantly higher price for such products dispensed by vending machines, sales are likely to decline. In order to avoid such declines in sales, marketers tend to be very consistent in the price charged for vending machine products. This is an example of marketers employing a __________ strategy. a. b. c. d. e. below-market pricing skimming pricing penetration pricing customary pricing loss-leader pricing
Answer: d Page: 264 Other Location: web Rationale: For some products tradition, competitive factors, or a standardized distribution channel play a key role in the determination of product price. Vending machines are a prime example of a situation where customary pricing dictates the price charged for the product. As noted in the text, it may be more effective to change the quantity of the product rather than change the price of the product.
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12-75 CUSTOMARY PRICING
CONCEPTUAL
Vending machines are a good example of the application of what type of competition-based pricing? a. b. c. d. e. customary pricing above-,at-,or below-market pricing loss-leader pricing penetration pricing bundle pricing
Answer: a Page: 264 Rationale: Customary pricing is a method of pricing based on a product's tradition, standardized channel of distribution, or other competitive factors. This is the situation with vending machines. 12-76 CUSTOMARY PRICING APPLICATION
Southern gardeners have a preconceived idea on what they will pay for pine bark mulch that they buy at their local gardening supply store to keep the weeds down in their gardens. If the price being charged is not within a narrow range that they feel is appropriate, they will make substitutions--newspaper, grass clippings or some other kind of ground covering. When pricing pine bark mulch, a garden supply retailer should use: a. b. c. d. e. customary pricing. above-,at-,or below market pricing. loss-leader pricing. penetration pricing. bundle pricing.
Answer: a Page: 264 Rationale: Customary pricing is a method of pricing based on a product's tradition, standardized channel of distribution, or other competitive factors. Pine bark mulch has a traditional price that consumers are aware of.
12-77 ABOVE-MARKET PRICING
APPLICATION
A Swedish company such as Asko that prides itself on manufacturing and marketing some of the best-built and most expensive appliances in the world is using which competition-based method of pricing? a. b. c. d. e. customary pricing above-market pricing loss-leader pricing bait-and-switch pricing bundle pricing
Answer: b Page: 264 Rationale: The market price of a product is what customers are generally willing to pay, not necessarily the price that the firm sets. Marketing managers often have a subjective feel for the competitors price or the market price. Using this benchmark, they may then choose a strategy of above-, at-, or below-market pricing. Asko has decided to price its products far above the industry pricing "benchmark," an above-market pricing strategy. 12-78 BELOW-MARKET PRICING APPLICATION
An ad campaign by Suave shampoo asked television viewers to identify the hair that was shampooed and conditioned with Suave products and the hair on which expensive salon hair-care products were used. The idea of the ad was that a person could not tell by looking that a woman was using the much cheaper Suave brand. By making price its selling point, Suave is most likely using: a. b. c. d. e. demand backward pricing. below-market pricing. loss-leader pricing. prestige pricing. skimming pricing.
Answer: b Page: 264 Rationale: The promotional campaign for Suave implies that its prices are significantly below those of equal products on the market, a below-market pricing strategy.
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12-79 BELOW-MARKET PRICING
CONCEPTUAL
Manufacturers of generic products use which method of competition-based pricing? a. b. c. d. e. demand backward pricing below-market pricing loss-leader pricing prestige pricing skimming pricing
Answer: b Page: 264 Rationale: The market price of a product is what customers are generally willing to pay, not necessarily the price that the firm sets. Marketing managers often have a subjective feel for the competitors price or the market price. Using this benchmark, they may then choose a strategy of above-, at-, or below-market pricing. Manufacturers of generic products and retailers selling private brands often deliberately set prices between 8 and 10 percent lower than nationally branded competitive products, which is a below-market pricing strategy. 12-80 LOSS-LEADER PRICING Loss-leader pricing is: a. b. c. d. e. a pricing method where the price the seller quotes includes all transportation costs. setting the same price for similar customers who buy the same product and quantities under the same conditions. deliberately selling a product below its customary price to attract attention to it. a method of pricing based on a product's tradition, standardized channel of distribution, or other competitive factors. pricing based on intensity of customer demand. DEFINITION
Answer: c Page: 265 Other Location: web Rationale: Text term definitionloss-leader pricing 12-81 LOSS-LEADER PRICING CONCEPTUAL
Using __________, many retailers deliberately sell products below their normal prices (and sometimes below cost) to attract attention and induce additional store traffic. a. b. c. d. e. customary pricing above-market pricing loss-leader pricing prestige pricing skimming pricing
Answer: c Page: 265 Rationale: Loss-leader pricing is deliberately pricing a product below its customary price to attract consumer attention to it. It is hoped that customers will buy other, higher-margin products while in the store.
12-82 LOSS-LEADER PRICING
APPLICATION
When Pechin's, a legendary supermarket 50 miles south of Pittsburgh, prices rib steaks at $2.29 a pound, which is below its cost, it is attempting not to sell steaks, but to: a. b. c. d. e. drive its competition out of business. attract customers in hopes they will buy other products as well. fill its parking lot so its store will look successful. help the local ranching community dispose of excess beef. circumvent fair trade rulings by the Federal Trade Commission (FTC).
Answer: b Page: 265 Other Location: web Rationale: When retailers use loss-leader pricing, their purpose is to attract customers in the hopes that they will buy other items in the store as well. 12-83 DEMAND CURVE CONCEPTUAL
Newsweek ran a pricing experiment that involved setting different prices for its magazine in different cities and counting the number of units sold. After adjusting for factors like the population of the different cities, Newsweek could plot these prices and units to result in a: a. b. c. d. e. target return curve. demand curve. unit volume curve. consumer tastes curve. unit cost curve.
Answer: b Page: 265 Rationale: A demand curve shows the number of products that will be sold at a given price. Newsweek collected enough data to be able to plot the prices and units resulting in a demand curve for the magazine. 12-84 DEMAND CURVE A demand curve shows: a. b. c. d. e. the total number of buyers for all products in a particular industry. the total sales for specified product lines, usually over a three-year period. a maximum number of products consumers will buy at a given price. anticipated marginal revenue obtained under specified customer demand conditions. the opposing axis on a profit equation projection. DEFINITION
Answer: c Page: 265 Other Location: web Rationale: Key term definitiondemand curve
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12-85 DEMAND CURVE
DEFINITION
The maximum quantity of products consumers will buy at given price is shown by: a. b. c. d. e. a demand curve. a price constraints. a break-even point. price lining. a marginal revenue curve.
Answer: a Page: 265 Rationale: Key term definitiondemand curve 12-86 DEMAND FACTORS CONCEPTUAL
Which of the following statements about the factors that influence demand is true? a. b. c. d. e. As the availability of close substitutes increases, the demand for a product increases. As real consumer income increases, demand for a product increases. As the price of close substitutes increases, demand for a product declines. Changing consumer tastes have little impact on demand for a product. All of the above statements about the factors that influence demand are true.
Answer: b Page: 265 Rationale: As price falls, more people decide to buy a product and unit sales increase. But price is not the complete story in estimating demand. Economists emphasize three other key factors: (1) consumer tastes, which can change quickly; (2) price and availability of similar productsif the price of a similar product falls, more people will buy it and demand for the target product will fall; (3) consumer incomeas real consumer income increases, demand for a product also increases. Alternative b is the only correct alternative. 12-87 DEMAND FACTORS DEFINITION
Factors that determine consumers' willingness and ability to pay for goods and services are called: a. b. c. d. e. economic environmental factors. the misery index. demand factors. elasticity factors. consumer income.
Answer: c Page: 265 Rationale: Text term definitiondemand factors
12-88 DEMAND FACTORS Demand factors are factors that determine: a. b. c. d. e. the number of consumers who can afford to purchase a product or service. the price that should be charged for a given product. consumers' willingness and ability to pay for goods and services. the number of consumers who want to purchase a product. the number of consumers who can purchase a product.
DEFINITION
Answer: c Page: 265 Rationale: Text term definitiondemand factors 12-89 DEMAND FACTORS APPLICATION
There are a lot of skateboards on the market, but the BMW Streetcarver is the only one with stabilizers and wheel design based on BMW's automobile. This technology gives the BMW Streetcarver better control at high speeds and around sharp turns than any other brand. The skateboard is priced at $495, which leaves many consumers (especially young males) who might want to buy the Streetcarver unable to afford it. This inability to pay for the high-priced BMWmade skateboard shows the affect of __________ on sales. a. b. c. d. e. demand factors macroeconomic environmental factors the consumer index supply factors exchange parameters
Answer: a Page: 265 Rationale: Demand factors are factors that determine consumers' willingness and ability to pay for goods. In this case, consumer incomes of the young males in the target market prevent them from having the ability to pay for the Streetcarver in most cases.
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12-90 DEMAND FACTORS
APPLICATION
Mrs. Renfro's, Inc., is a company that sells 25 different relishes in 45 different states. Mrs. Renfro's chipotle corn salsa is so popular that the company cannot make enough to keep its resellers stocked. Its price of $4.50 for a jar seems just right to consumers who savor its hot and spicy taste. The popularity of hot and spicy food is an example of a(n) __________ that Mrs. Renfro's has used to make its product a success. a. b. c. d. e. exchange parameter demand factor supply factor consumer index macroeconomic environmental factor
Answer: b Page: 265 Rationale: Demand factors are factors that determine consumers' willingness and ability to pay for goods. The consumer taste for hot and spicy foods has increased consumers' willingness to pay. 12-91 MOVEMENT ALONG A DEMAND CURVE A movement along the demand curve assumes: a. b. c. d. e. the availability of substitutes remains the same. price is the only factor that will change quantity sold. consumer incomes remain the same. consumer tastes remain the same. A movement along the demand curve assumes all of the above. CONCEPTUAL
Answer: e Page: 266; Figure 12-3A Rationale: As shown in Figure 12-3A, a movement along a demand curve shows that as the price is lowered, the quantity demanded increases. This also assumes that other factors such as consumer tastes, price and availability of substitutes, and consumer income remain unchanged. 12-92 SHIFT IN THE DEMAND CURVE A shift in the demand curve means: a. b. c. d. e. the availability of substitutes remains the same. at a given price, more (or less) product is sold. consumer incomes remain the same. consumer tastes remain the same. the same thing as a movement along the demand curve. CONCEPTUAL
Answer: b Page: 266; Figure 12-3B Rationale: As shown in Figure 12-3B, a shift in the demand curve shows that additional (or less) quantity is sold at the same price. This is usually due to other changes in other factors such as consumer tastes, price and availability of substitutes, and/or consumer income.
12-93 PRICE ELASTICITY OF DEMAND
APPLICATION
Ace Shoe Co. has fixed costs of $6 million and unit variable costs of $5 per pair. Suppose a consultant tells Ace it can sell 700,000 pairs of shoes, it should seek a profit of $2.5 million, and it should select an appropriate price to meet that 700,000 target based only on the profit target. What potential error is the consultant making? a. b. c. d. e. assuming that fixed costs are independent of price assuming that units sold is independent of price assuming that some fixed costs are variable assuming that some variable costs are fixed neglecting the elasticity of supply
Answer: b Page: 266 Rationale: The consultant assumes that price resulting from specifying the profit and quantity sold is one consumers are willing to pay. This is a very big assumption and is the same as saying demand is unrelated to price. 12-94 PRICE ELASTICITY OF DEMAND CONCEPTUAL
Other things equal, if a firm finds the demand for one of its products is inelastic, it can INCREASE its total revenues by: a. b. c. d. e. raising its price. lowering its price. reducing fixed costs. reducing variable costs. reducing both fixed and variable costs.
Answer: a Page: 266 Rationale: A product with inelastic demand means that slight increases or decreases in price will not significantly affect the demand, or units sold, for the product. Under this condition, increasing the price will result in approximately the same number of products being sold at a higher price, thus increasing total revenue. (TR = P x Q) 12-95 PRICE ELASTICITY OF DEMAND DEFINITION
__________ refers to how sensitive consumer demand and the firms revenues are to changes in the products price. a. b. c. d. e. Marginal revenue Price elasticity of demand Average demand Marginal demand Demand shift
Answer: b Page: 266 Rationale: Text term definitionprice elasticity of demand
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12-96 PRICE ELASTICITY OF DEMAND
APPLICATION
At a price of $3 each, SHAPE magazine sells 1.25 million copies of its magazine targeted to young women seeking a healthier lifestyle. If the price per issue is increased to $3.25 each, only 1 million copies will be sold. Using the information provided, the price elasticity of demand for SHAPE magazine in this price range can be described as: a. b. c. d. e. inelastic demand. elastic demand. unitary demand. null elasticity. subsidized elasticity.
Answer: b Page: 266 Rationale: Price elasticity of demand refers to how sensitive consumer demand and the firms revenues are to changes in the products price. A product with elastic demand is one in which a slight decrease in price results in a relatively large increase in demand or units sold. The reverse is also true. Since a small increase in price from $3 to $3.25 causes sales to drop by 250,000 copies (or 20%), the magazine has elastic demand. 12-97 PRICE ELASTICITY OF DEMAND APPLICATION
Richard Anderson, an entrepreneur residing in Arizona, noticed that many of his friends and neighbors complained of the intense heat during the summer months. In order to make the heat more bearable, Anderson developed and marketed a simple cooling system that sprayed a fine mist of water into the air. The system attached easily to patio roofs, backyard fences, and even golf carts. Since introducing the product on the market, Anderson has discovered that relatively small changes in the price of the system lead to relatively large changes in demand for his product. The demand for Anderson's product is: a. b. c. d. e. price inelastic. price elastic. price sensitive. price insensitive. unitary elastic.
Answer: b Page: 266 Other Location: web Rationale: Price elasticity of demand refers to how sensitive consumer demand and the firms revenues are to changes in the products price. A product with elastic demand is one in which a slight decrease in price results in a relatively large increase in demand or units sold. The reverse is also true. Since Anderson discovered that relatively small changes in the price of the system lead to relatively large changes in demand for his product, its demand is elastic.
12-98 ELASTIC DEMAND
APPLICATION
Several companies produce latex gloves that are used in a variety of different industries. If one of the glove manufacturers decreases its price by just a few percentage points, it will result in a significant increase in quantity demanded. The demand for latex gloves is: a. b. c. d. e. synergistic. elastic. inelastic. holistic. entropic.
Answer: b Page: 266 Rationale: Text term definitionelastic demand 12-99 ELASTIC DEMAND Elastic demand exists when a(n): a. b. c. d. e. a small percentage decrease in price produces a smaller percentage increase in quantity demanded and total revenue falls. a small percentage decrease in price produces a larger percentage increase in quantity demanded and total revenue increases. an increase in price causes a larger increase in quantity demanded and total revenue falls to zero. the quantity demanded remains the same regardless of level of price and total revenue is unchanged. a small percentage decrease in price produces a smaller percentage decrease in quantity demanded and total revenue increases. CONCEPTUAL
Answer: b Page: 266 Rationale: Price elasticity of demand refers to how sensitive consumer demand and the firms revenues are to changes in the products price. A product with elastic demand is one in which a slight decrease in price results in a relatively large increase in demand or units sold. The reverse is also true.
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12-100 INELASTIC DEMAND Inelastic demand exists when a(n): a. b. c. d. e.
CONCEPTUAL
slight increase or decrease in price will not significantly affect the demand, or units sold for the product. a small percentage decrease in price produces a larger percentage increase in quantity demanded and total revenue increases. an increase in price causes a larger increase in quantity demanded and total revenue falls to zero. the quantity demanded increases regardless of level of price and total revenue is unchanged. a small percentage decrease in price produces a smaller percentage decrease in quantity demanded and total revenue increases.
Answer: a Page: 267 Rationale: A product with inelastic demand means that slight increases or decreases in price will not significantly affect the demand, or units sold, for the product. Products and services considered as necessities usually have inelastic demand. 12-101 DEMAND AND REVENUE CONCEPTUAL
Marketing executives must translate estimates of customer demand into estimates of: a. b. c. d. e. personnel requirements. advertising expenditures. public relations efforts. revenues. none of the above.
Answer: d Page: 267; Figure 12-4 Rationale: Demand curves lead directly to an essential revenue concept critical to pricing decisions: total revenuethat is unit price (P) times the quantity sold (Q). Knowing an estimate of total revenue, in combination with estimating total costs helps the marketing executive to forecast whether sales of a particular item with result in a profit for the company.
12-102 TOTAL REVENUE
APPLICATION
At a price of $3 each, SHAPE magazine sells 1.25 million copies of its magazine targeted to young women seeking a healthier lifestyle. If the price is increased to $3.25 each, only 1 million copies will be sold. Fixed costs are $1 million and unit variable costs are $0.50 per magazine. From the information provided here, what is SHAPE magazine's total revenue, obtained at the higher price? a. b. c. d. e. $3,750,000 $3,250,000 $2,125,000 $1,625,000 $675,000
Answer: b Page: 267 Rationale: Total revenue = Price x Quantity. Total revenue at the higher price is equal to the price of $3.25 x the quantity of 1,000,000 copies, or $3,250,000. 12-103 TOTAL REVENUE APPLICATION
At a price of $3 each, SHAPE magazine sells 1.25 million copies of its magazine targeted to young women seeking a healthier lifestyle. If the price per issue is increased to $3.25 each, only 1 million copies will be sold. Fixed costs are $1 million and unit variable costs are $0.50 per magazine. From the information provided here, what is SHAPE magazine's total revenue obtained at the lower price? a. b. c. d. e. $3,750,000 $3,000,000 $2,125,000 $1,625,000 $675,000
Answer: a Page: 267 Rationale: Total revenue = Price x Quantity. Total revenue at the higher price is equal to the price of $3 x the quantity of 1,250,000 copies, or $3,750,000. 12-104 TOTAL COST The sum of fixed and variable costs is called: a. b. c. d. e. marginal cost. value added. average cost. total administrative overhead. total cost. DEFINITION
Answer: e Page: 268 Other Location: web Rationale: Key term definitiontotal cost
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12-105 FIXED COST Fixed cost refers to: a. b. c. d. e.
DEFINITION
the sum of the firms expenses that vary directly with the quantity of the product produced and sold. the total expense incurred by a firm in producing and marketing a product or service. the firms expenses that are stable and do not change with the quantity of the product that is produced and sold. the consideration exchanged for the ownership or use of a good or service. total firm expenses incurred in producing or selling one additional unit of product.
Answer: c Page: 268 Rationale: Key term definitionfixed cost 12-106 FIXED COST DEFINITION
The firms expenses that are stable and do not change with the quantity of the product that is produced and sold is called: a. b. c. d. e. fixed cost. variable cost. total cost. marginal cost. inelastic costs.
Answer: a Page: 268 Rationale: Key term definitionfixed cost 12-107 FIXED COST Which of the following is a typical example of a fixed cost? a. b. c. d. e. sales taxes building rental expense raw materials sales commissions hourly wages CONCEPTUAL
Answer: b Page: 268 Rationale: Fixed costs are the firms expenses that are stable and do not change with the quantity of product that is produced and sold. The building rental expense is stable regardless of how much the firm produces and sells.
12-108 FIXED COST
APPLICATION
Which of the following would be an example of a fixed cost for a company that makes carbon monoxide monitoring systems for employees to wear that work in hazardous areas? a. b. c. d. e. the lithium batteries that are used in each monitor the chest harness which the employee must use to wear the monitor the rent for the companys offices the free training videos that are sent to each new customer the stainless steel, water-resistant cases in which the monitors sit
Answer: c Page: 268 Rationale: Fixed costs are the firms expenses that are stable and do not change with the quantity of product that is produced and sold. The rental expense is stable regardless of how much the firm produces and sells. 12-109 FIXED COST Rents, executive salaries, and insurance are examples of typical: a. b. c. d. e. variable costs. fixed costs. dividends. liquidity payments. total costs. CONCEPTUAL
Answer: b Page: 268 Rationale: Fixed costs are the firms expenses that are stable and do not change with the quantity of product that is produced and sold. Rental expense, executive salaries, and insurance are stable regardless of how much the firm produces and sells, thus they are fixed costs. 12-110 VARIABLE COST Variable cost is the: a. b. c. d. e. total expense incurred by a firm in producing and marketing a product or service. sum of the expenses of the firm that are stable and do not change with the quantity of the product that is produced and sold. money or other considerations (including other goods and services) exchanged for the ownership or use of a good or service. change in total cost that results from producing and marketing one additional unit of product. sum of the expenses of the firm that vary directly with the quantity of products that is produced and sold. DEFINITION
Answer: e Page: 268 Rationale: Key term definitionvariable cost
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12-111 VARIABLE COST
DEFINITION
The sum of the expenses of the firm that vary directly with the quantity of the product that is produced and sold is called: a. b. c. d. e. fixed cost. total cost. marginal cost. administrative costs. variable cost.
Answer: e Page: 268 Rationale: Key term definitionvariable cost 12-112 UNIT VARIABLE COST APPLICATION
Ships Ahoy is a small company that makes model sailboat kits priced at $120. The costs of the materials that go into each kit are $45. It costs $5 in labor to assemble a kit. The company has monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $3,500 for the monthly salary of its owner. Ships Ahoy's unit variable cost is: a. b. c. d. e. $45. $50. $120. $170. cannot be determined from the information provided.
Answer: b Page: 268 Rationale: Variable cost is the sum of the expenses of the firm that vary directly with the quantity of the products that is produced and sold. In this case, the materials for each kit ($45) and the labor to assemble a kit ($5) are the variable cost of each kit ($50). 12-113 VARIABLE COST APPLICATION
Which of the following would be an example of a variable cost for a publication like SHAPE magazine that is targeted to young women seeking a healthier lifestyle? a. b. c. d. e. increase in women in targeted demographics salary of publisher rent for parking deck used by employees paper and ink advertising purchased by new accounts
Answer: d Page: 268 Rationale: Variable cost is the sum of the expenses of the firm that vary directly with the quantity of the products that is produced and sold. The amount of paper and ink vary directly with the number of magazines produced and, hence, are variable costs. Alternative e describes revenue, not costs.
12-114 BREAK-EVEN ANALYSIS
APPLICATION
The Precision Writing Instruments Company makes two pen designsthe Cordova design and the Savannah design. These data apply, regardless of which of two pen designs is being implemented. Materials cost per pen is $6. Labor cost per pen is $5. Production overhead is $1,000,000. Advertising and promotion is $1,000,000. Marketing research has estimated the following demand functions for the next year of sales for the two pen designs where Q represents demand in thousands and P represents price. For the Cordova design, Q = 150 - 2.5P. For the Savannah design, Q = 175 - 2.1P. What are the total costs for sales of 500,000 units of the Cordova design? a. b. c. d. e. $1,000,000 $2,000,000 $3,650,00 $5,500,000 $7,500,000
Answer: e Page: 268-269 Other Location: web Rationale: The demand function of each design is irrelevant. The answer is Total costs = Fixed costs + Variable costs= (1,000,000 +1,000,000) + (500,000 units x $11/unit) = $7,500,000 12-115 BREAK-EVEN ANALYSIS: PROFIT APPLICATION
The Precision Writing Instruments Company makes two pen designsthe Cordova design and the Savannah design. These data apply, regardless of which of two pen designs is being implemented. Materials cost per pen is $6. Labor cost per pen is $5. Production overhead is $1,000,000. Advertising and promotion is $1,000,000. Marketing research has estimated the following demand functions for the next year of sales for the two pen designs where Q represents demand in thousands and P represents price. For the Cordova design, Q = 150 - 2.5P. For the Savannah design, Q = 175 - 2.1P. A penetration strategy is proposed for the Savannah design and a price of $25 is selected. What will be the profit or loss for the first year? a. b. c. d. e. $285,000 loss $306,250 loss $2,112,500 profit $2,222,500 profit $3,237,500 profit
Answer: a Page: 269; Figure 12-6 Rationale: Quantity of the Savannah design sold is given by Q = 175 - 2.1 P = 175 - (2.1 x 25) = 122.5 (in thousands) = 122,500 units. Profit = Total revenue - Total cost = (P x Q) - (FC + UVC) = ($25 x 122,500 units) - ($2,000,000 + $11 x 122,500 units) = - $285,000 or a loss of $285,000
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12-116 BREAK-EVEN ANALYSIS: PROFIT
APPLICATION
The Precision Writing Instruments Company makes two pen designsthe Cordova design and the Savannah design. These data apply, regardless of which of two pen designs is being implemented. Materials cost per pen is $6. Labor cost per pen is $5. Production overhead is $1,000,000. Advertising and promotion is $1,000,000. Marketing research has estimated the following demand functions for the next year of sales for the two pen designs where Q represents demand in thousands and P represents price. For the Cordova design, Q = 150 - 2.5P. For the Savannah design, Q = 175 - 2.1P. A price skimming strategy is proposed for the Savannah design and a price of $40 is selected. What will be the profit or loss for the first year? a. b. c. d. e. $600,000 loss $639,000 profit $994,000 profit $1,639,000 profit $2,112,500 profit
Answer: b Page: 269: Figure 12-6 Rationale: Quantity Savannah design sold is given by Q = 175 - 2.1P = 175 - (2.1 x 40) = 91 (in thousands) = 91,000 units. Profit = Total revenue - Total cost= (P x Q) - (FC - UVC) = ($40 x 91,000 units) - ($2,000,000 + $11 x 91,000 units) = $639,000 12-117 BREAK-EVEN ANALYSIS APPLICATION
The owner of a small restaurant that sells take-out fried chicken and biscuits pays $2,500 in rent each month, $500 in utilities, $750 interest on his loan, insurance premium of $200, and advertising on local buses $250 a month. A bucket of take-out chicken is priced at $9.50. Unit variable costs for the bucket of chicken are $5.50. How many small buckets of chicken does the restaurant need to sell to break-even? a. b. c. d. e. 988 buckets 1,000 buckets 1,050 buckets 3,150 buckets 4,200 buckets
Answer: c Page: 268-269 Rationale: The break-even point is calculated as fixed costs divided by price minus unit variable costs, or $4,200/($9.50 - $5.50), which equals 1,050 buckets of chicken.
APPLICATION
The owner of a small restaurant that sells take-out fried chicken and biscuits pays $2,500 in rent each month, $500 in utilities, $750 interest on his loan, insurance premium of $200, and advertising on local bus $250 a month. A small bucket of take-out chicken, the only menu item, is priced at $9.50. Unit variable costs for the bucket of chicken are $5.50. At what level of sales in dollars of revenue will the restaurant break-even? a. b. c. d. e. $9,386.00 $9,500.00 $9,975.00 $29,925.00 $39,900.00
Answer: c Page: 268-269 Rationale: The break-even point is calculated as fixed costs divided by price minus unit variable costs, or $4,200/($9.50 - $5.50), which equals 1,050 buckets of chicken. Then multiply 1,050 by $9.50, which equals $9,975.00, which is the break-even point in dollars. 12-119 BREAK-EVEN ANALYSIS APPLICATION
You have been asked to calculate the break-even point for a new line of shirts. The selling price will be $35 per shirt. The labor costs will be $5 per shirt. The administrative costs of operating the company are estimated to be $60,000 annually and the sales and marketing expenses are $20,000 a year. Additionally, the cost of materials will be $10 per shirt. What is the break-even quantity? a. b. c. d. e. 1,715 shirts 2,286 shirts 3,000 shirts 4,000 shirts 16,000 shirts
Answer: d Page: 268-269 Rationale: The break-even point is calculated as fixed costs divided by price minus unit variable costs, or 80,000/(35-15) = 4,000 shirts needed to break-even.
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APPLICATION
Tim Marlow, the owner of The Clock Works, wanted to know how many clocks he must sell in order to cover his fixed cost at a given price. Tim knew that he had a fixed cost of $20,000 for equipment, taxes, and a bank loan. He also had a unit variable cost of $20 per clock for labor, materials, and promotional costs. If the price Tim charges for each of his clocks is $40, what is his break-even point quantity? a. b. c. d. e. 10 clocks 100 clocks 1,000 clocks 10,000 clocks cannot be determined from the information provided
Answer: c Page: 268-269 Rationale: The break-even point is calculated as fixed costs divided by price minus unit variable costs, or 20,000/(40-20) = 1,000 clocks. 12-121 BREAK-EVEN ANALYSIS APPLICATION
Ace Shoe Company sells heel replacement kits for men's shoes. It has fixed costs of $6 million and unit variable costs of $5 per pair. If the company charges $15 per pair, how many pairs must it sell to break even? a. b. c. d. e. 300,000 kits 400,000 kits 600,000 kits 1,200,000 kits 2,000,000 kits
Answer: c Page: 268-269 Rationale: The break-even point is calculated as fixed costs divided by price minus unit variable costs, or 6,000,000/(15-5) = 600,000.
APPLICATION
Ace Shoe Company sells heel replacement kits for men's shoes. It has fixed costs of $6 million and unit variable costs of $5 per pair. Ace would like to earn a profit of $2 million; how many pairs must they sell at a price of $15? a. b. c. d. e. 100,000 kits 200,000 kits 600,000 kits 800,000 kits 1,400,000 kits
Answer: d Page: 268-269 Rationale: There are two ways to approach this problem. One is to add the profit to the fixed cost of Ace Shoe Company. Then divide the sum by the price minus unit variable costs. This will also give you 800,000 kits. Another method is: Let Q = Target Quantity. Profit = Total Revenue - Total Cost Total = [P x Q] [FC + (UVC x Q)] = Revenue = [15 x Q] [$6,000,000 + (5 x = Q)] = 15Q $6,000,000 5Q = 10Q Q 12-123 BREAK-EVEN ANALYSIS = = $2,000,00 0 $2,000,00 0 $2,000,00 0 8,000,000 800,000
kits APPLICATION
Ace Shoe Company sells heel replacement kits for men's shoes. It has fixed costs of $6 million and unit variable costs of $5 per pair. Suppose a consultant tells Ace it can sell 700,000 heel repair kits, what price must it charge to achieve a profit of $2.5 million? a. b. c. d. e. $3.58 $7.58 $12.15 $17.14 $17.90
Answer: d Page: 268-269 Other Location: web Rationale: Use the break-even formula and solve for price. Let P stand for price. 700,000 = [2,500,000 + 6,000,000]/[P - 5] P = $17.14
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APPLICATION
Ampro-Mag is a small company that makes materials for safely controlling hazardous spills of all kinds. It sells these items as a neutralizing kit priced at $120. The costs of the materials that go into each kit are $45. It costs $5 in labor to assemble a kit. The company has monthly expenses of $2,800 for rent and insurance, $200 for heat and electricity, $500 for advertising in trade journals, and $3,500 for the monthly salary of its owner. What is Ampro-Mag's monthly breakeven point in terms of number of neutralizing kits sold? a. b. c. d. e. 47 neutralizing kits 68 neutralizing kits 75 neutralizing kits 100 neutralizing kits 310 neutralizing kits
Answer: d Page: 268-269 Rationale: The break-even point is calculated as fixed costs divided by price minus unit variable costs, or [$2,800 + $200 + $500 + $3,500]/[$120 - ($5 + $45)] = 100 kits. 12-125 BREAK-EVEN ANALYSIS APPLICATION
Jane Westerlund owns a picture-framing shop, The Caplow Co. The average price she receives for a picture she frames for a customer is $120. This price must cover her average costs for a typical framed picture of $5 for glass, $2 for matting, and $13 for the frame, and $30 for the labor involved. She must also cover monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $3,500 for her salary. Westerland is considering buying an automatic mat-cutting machine in order to reduce the number of hours of direct labor required to produce a framed picture. In considering this purchase, she should recognize it will __________ Caplow's variable cost and __________ Caplow's fixed cost. a. b. c. d. e. decrease; increase decrease; decrease increase; decrease increase; increase have no effect on; have no effect on
Answer: a Page: 268-269 Rationale: The automatic mat-cutting machine will be a fixed cost, which will increase the total fixed cost. This is done in order decrease the variable cost (labor) involved in cutting the mat for the framed picture.
APPLICATION
Ace Shoe Company sells heel replacement kits for men's shoes. It has fixed costs of $6 million and unit variable costs of $5 per pair. Ace is considering a switch from manual labor to an automated process. New equipment would cost an additional $4 million per year while lowering variable costs by $2 per shoe repair kit. How many kits would Ace have to sell at $15 per pair to make $2 million in profits in the next year with the automated process? a. b. c. d. e. 169,231 kits 666,667 kits 705,883 kits 800,000 kits 1,000,000 kits
Answer: e Page: 268-269 Rationale: The quantity to achieve this profit is calculated as profit + fixed costs divided by price minus unit variable costs, or [$2,000,000 + ($6,000,000 + $4,000,000)]/[$15 ($5 - $2)] = 1,000,000 kits. 12-127 BREAK-EVEN ANALYSIS APPLICATION
You are president of a manufacturer of small electronic appliances company. You want to reduce your break-even quantity. Other things equal, you can do this by: a. b. c. d. e. increasing the quantity sold, while keeping price unchanged. reducing marginal revenue. reducing unit variable cost. increasing fixed cost. doing all of the above.
Answer: c Page: 268-269 Rationale: Increasing the quantity sold leaving the price unchanged (Alternative a) will increase profit but has no impact on break-even quantity. Alternatives b and d will actually increase the break-even quantity. Reducing unit variable cost will increase the amount of the price that will be contributed to covering the fixed cost, thus resulting in fewer units to sell.
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APPLICATION
Jane Westerlund owns a picture-framing shop, The Caplow Co. The average price she receives for a picture she frames for a customer is $120. This price must cover her average costs for a typical framed picture of $5 for glass, $2 for matting, and $13 for the frame, and $30 for the labor involved. She must also cover monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $3,500 for her salary. Assuming everything else stays the same, if Westerlund wants to increase her monthly salary to $4,000, this would cause the break-even quantity to __________. a. b. c. d. e. decrease double increase stay the same not enough information given to determine the answer
Answer: c Page: 268-269 Other Location: web Rationale: The break-even point is the quantity at which total revenue and total cost are equal. BEP = FC/(P-unit VC). Since salary is a fixed cost, increasing this fixed cost will result in additional units needed to be sold to cover the increased fixed cost. 12-129 BREAK-EVEN ANALYSIS APPLICATION
Jane Westerlund owns a picture-framing shop, The Caplow Co. The average price she receives for a picture she frames for a customer is $120. This price must cover her average costs for a typical framed picture of $5 for glass, $2 for matting, and $13 for the frame, and $30 for the labor involved. She must also cover monthly expenses of $1,000 for rent and insurance, $200 for heat and electricity, $500 for advertising, and $3,500 for her salary. Assuming everything else stays the same, if Jane Westerlund increased the average price charged for a framed picture the breakeven quantity would ___________. a. b. c. d. e. decrease double increase stay the same not enough information given to determine the answer
Answer: a Page: 268-269 Rationale: The break-even point is the quantity at which total revenue and total cost are equal. BEP = FC/(P-unit VC). Since increasing the price while keeping the VC the same, increases the amount of revenue contributed to fixed costs, fewer units will need to be sold to cover the fixed cost.
12-130 BREAK-EVEN ANALYSIS Break-even analysis is: a. b. c. d. e.
DEFINITION
a process that investigates the magnitude of difference between marginal revenue and marginal cost. a method of determining just how much a consumer is willing to pay for a product or service. a technique that analyzes the relationship between total revenue and total cost to determine profitability at various levels of output. the process of determining the quantity of product consumers will buy relative to the quantity produced by the firm. the graph that shows the maximum number of products consumers will buy at a given price.
Answer: c Page: 268-269 Rationale: Key term definitionbreak-even analysis 12-131 BREAK-EVEN POINT A break-even point is: a. b. c. d. e. the point of greatest difference between marginal revenue and marginal cost. the point at which total revenue and total cost are equal. the point at which marginal revenue equals marginal cost. the point at which total revenue and average revenue converge. the point at which profit is at a maximum. DEFINITION
Answer: b Page: 268-269 Rationale: Text term definitionbreak-even point 12-132 BREAK-EVEN POINT The quantity at which total revenue and total cost are equal is called the: a. b. c. d. e. break-even point. point of maximum profit. coverage amount. incremental return quantity. shadow price quantity. DEFINITION
Answer: a Page: 268-269 Rationale: Text term definitionbreak-even point
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12-133 BREAK-EVEN CHART A __________ is a graphic presentation of the break-even analysis. a. b. c. d. e. Gantt chart demand curve ROI analysis cross-tabulation break-even chart
DEFINITION
Answer: e Page: 269; Figure 12-7 Rationale: Text term definitionbreak-even chart 12-134 BREAK-EVEN CHART CONCEPTUAL
A __________ is most often used in marketing to study the impact on profits of changes in price, fixed costs, and variable costs. a. b. c. d. e. Gantt chart break-even chart ROI analysis cross-tabulation demand curve
Answer: b Page: 269; Figure 12-7 Rationale: Text term definitionbreak-even chart 12-135 PRICING OBJECTIVES DEFINITION
__________ specify the role of price in an organization's marketing and strategic plans. a. b. c. d. e. a business mission. pricing constraints. pricing objectives. a pricing plan. list or quoted prices.
Answer: c Page: 270 Rationale: Key term definitionpricing objectives
12-136 PRICING OBJECTIVES Which of the following is a major pricing objective? a. b. c. d. e. profit unit volume market share survival All of the above are major pricing objectives.
CONCEPTUAL
Answer: e Page: 270 Rationale: The six major pricing objectives are: profit, sales, market share, unit volume, survival, and social responsibility. 12-137 PRICING OBJECTIVES Which of the following statements about pricing objectives is true? a. b. c. d. e. Market share and unit volume are synonymous. Unit volume is not a type of pricing objective because it is a production strategy. A firm that forgoes higher profits and wants to satisfy its obligations to its customers and society in general is pursuing a social responsibility objective. Target return is a type of market share objective. All of the above statements about pricing objectives are true. CONCEPTUAL
Answer: c Page: 270 Rationale: Pricing objectives specify the role of price in an organizations marketing and strategic plans. Pricing objectives include, profit, sales, market share, unit volume, survival and social responsibility. Market share and unit volume are two distinctly different types of pricing objectives. Target return is a type of profit objective. Only alternative c is correct.
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12-138 PROFIT OBJECTIVES Which of the following statements about profit objectives is true? a. b. c. d. e.
CONCEPTUAL
Managers in the United States have long been praised for their insistence on managing for long-run profits. Profit objectives are frequently measured in terms of return on investment. Firms that are interested in strategic planning set their objectives to maximize current profit. A target return pricing objective would only be used by a company that needs to attract more customers to survive. Market share and unit volume are two types of profit objectives.
Answer: b Page: 270 Other Location: web Rationale: Profit objectives in a firm are frequently measured in terms of return on investment. These objectives have different implications for pricing strategy. U.S. managers manage for the short-run because they are trying to maximize current profit. Firms that use maximizing current profit objectives are taking a short-term view rather than a strategic view. Alternative d is describing a survival objectivenot a target return objective. Alternative e contains two pricing objectives, but these are not profit objectives. 12-139 PROFIT OBJECTIVES Which of the following statements about profit objectives is true? a. b. c. d. e. One type of profit objective is managing for long-run profits. Profit objectives are frequently measured in terms of return on investment. American firms are sometimes criticized for maximizing current profit, another profit objective. Movie studios ensure that those firms in their channels of distribution make adequate profits. All of the above are true about profit objectives. CONCEPTUAL
Answer: e Page: 270 Rationale: Three different objectives relate to a firms profit, which is often measured in terms of return on investment. These objectives have different implications for pricing strategy. These include; (1)managing for long-run profits; (2) maximizing current profit; and (3) target return on investment. Movie studios ensure that those firms in their channels of distribution make adequate profits, otherwise, the movie studio is cut off from its customers.
12-140 SALES OBJECTIVES Which of the following statements about sales objectives is true? a. b. c. d. e.
CONCEPTUAL
Increases in sales revenue will lead to increases in market share and profit. Increases in sales revenue will lead to decreases in market share and profit. Sales objectives are not a subset of pricing objectives. Sales revenues are not meaningful targets for managers. All of the above are true about profit objectives.
Answer: a Page: 270 Rationale: Given that a firms profit is high enough for it to remain in business, an objective may be to increase sales revenue, which will in turn lead to increases in market share and profit. Objectives related to sales revenue or unit sales have the advantage of being translated easily into meaningful targets for marketing managers responsible for a product line or brand. 12-141 MARKET SHARE OBJECTIVES DEFINITION
When General Mills divides the sales revenue in a single year obtained by all its breakfast cereals by the breakfast cereal sales of all its competitors plus its own for that same year, it is calculating its: a. b. c. d. e. unit volume long-run profit. current profit. market share. target return.
Answer: d Page: 271 Rationale: Market share is the ratio of a firms sales revenues or unit sales to those of the industry (competitors plus the firm itself). 12-142 MARKET SHARE OBJECTIVES APPLICATION
If the CEO of the Clorox Company were to say, "We want to control 60 percent of the bleach market within the next five years, he would have set a _____ pricing objective. a. b. c. d. e. profit sales unit volume market share social responsibility
Answer: d Page: 271 Rationale: The CEO has set a numerical target for the percentage of the total bleach market, including his own sales, which is one definition of market share.
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12-143 UNIT VOLUME OBJECTIVES Which of the following is true about unit volume pricing objectives? a. b. c. d. e.
CONCEPTUAL
Firms using unit volume pricing objectives often sell multiple products t very different prices. Firms using unit volume pricing objectives need to match the unit volume demanded by customers with production capacity. Firms using unit volume pricing objectives need to match the unit volume demanded by customers with the price. A unit volume pricing objective can be achieved and profit can decrease. All of the above statements are true.
Answer: e Page: 271 Rationale: Many firms use unit volume, the quantity produced or sold, as a pricing objective. These firms often sell multiple products at very different prices and need to match the unit volume demanded by customers with price and production capacity. Using unit volume as an objective can be counterproductive if a volume objective is achieved, say, by drastic price cutting that drives down profit. 12-144 SURVIVAL OBJECTIVES Which of the following is true about survival pricing objectives? a. b. c. d. e. Profits, sales, and market share may be less important objectives than survival. Firms using survival pricing objectives need to match the unit volume demanded by customers with that demanded by competitors. Firms using survival pricing objectives are not seeking to improve cash flow. Market share pricing objectives are the same as survival pricing objectives. All of the above statements are true. CONCEPTUAL
Answer: a Page: 271 Rationale: In some instances, profits, sales, and market share are less important objectives of the firm than mere survival. Contintental Airlines has struggled to attract passengers with low fares and aggressive promotions to improve the firms cash flow. This pricing objective has helped Continental to stay alive in the competitive airline industry.
12-145 PRICING OBJECTIVES: SOCIAL RESPONSIBILITY
APPLICATION
Pharmaceutical companies that manufacture drugs for AIDS patients have been asked to provide free drugs to Africa where the disease is of epidemic proportions. So far, most of the companies have continued to charge for the medication. People who believe the pharmaceutical companies should provide free AIDS medication and recognize their obligation to act altruistically want the companies to have a __________ pricing objective. a. b. c. d. e. target return marginal profit unit volume survival social responsibility
Answer: e Page: 271 Rationale: A firm with a social responsibility pricing objective may forgo higher profit on sales and follow a pricing objective that recognizes its obligations to customers and society in general. In this case, the pharmaceutical companies would have to forgo higher profit on sales because they would be providing free drugs to Africa. People who believe the companies should do this, believe that the pharmaceutical companies have an obligation to do so to society in general. 12-146 PRICING CONSTRAINTS Factors that limit the range of prices a firm may set are: a. b. c. d. e. pricing objectives. pricing restraints. pricing constraints. pricing elasticity. the pricing environment. DEFINITION
Answer: c Page: 271 Rationale: Key term definitionpricing constraints 12-147 PRICING CONSTRAINTS Pricing constraints are: a. b. c. d. e. barriers that must be overcome in order to set pricing objectives. competitive pricing advantages one firm has over another. different pricing strategies for each of the firm's products. factors that limit the range of prices a firm may set. another name for demand curves. DEFINITION
Answer: d Page: 271 Rationale: Key term definitionpricing constraints
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12-148 PRICING CONSTRAINTS
CONCEPTUAL
Which term describes factors that affect price and include: newness of the product, demand for the product class, and competitors prices? a. b. c. d. e. price fixings pricing constraints price elasticities pricing demands pricing margins
Answer: b Page: 271 Rationale: Pricing constraints are factors that limit the range of price a firm may set, such as newness of the product, demand for the product class, product, and brand, cost of producing and marketing the product, competitors prices, and legal and ethical considerations. 12-149 PRICING CONSTRAINTS Which of the following factors would act as a constraint on pricing? a. b. c. d. e. The product is in high demand. The product is in the maturity stage of its product life cycle. The cost of the product to the firm is $100. Competitors' prices average $300 per unit. All of the above factors would act as constraints on pricing. CONCEPTUAL
Answer: e Page: 271 Rationale: Pricing constraints are factors that limit the range of price a firm may set, such as newness of the product (alternative b), demand for the product class, product, and brand (alternative a), cost of producing and marketing the product (alternative c), competitors prices (alternative d), and legal and ethical considerations. Thus all of the alternatives are factors that would act as constraints on pricing. 12-150 PRICING CONSTRAINTS: STAGE IN PRODUCT LIFE CYCLE Often, the earlier a product is in its life cycle: a. b. c. d. e. the lower the price the firm must charge. the more competition it has. the greater the flexibility to charge a higher price. the lower the production costs. the lower the unit variable cost. CONCEPTUAL
Answer: c Page: 271 Rationale: Pricing constraints are factors that limit the range of price a firm may set, such as newness of the product, demand for the product class, product, and brand, cost of producing and marketing the product, competitors prices, and legal and ethical considerations. Early in the product life cycle a firm can often charge a higher price because there are few, if any, substitutable products. This is an example of one of the pricing constraints the firm should consider.
12-151 PRICING CONSTRAINTS: STAGE IN PRODUCT LIFE CYCLE
APPLICATION
Pharmacist and new father Kenneth Kramm wanted his son to take his medicine, but it was a battle. As a result Kramm developed FLAVORx, a liquid medicine-flavoring system that can mask the taste or smell of medicine. FLAVORx tastes of strawberry or grape and has no effect on the medicinal value of the drug to which it is added. It is the first product of its kind. Because Flavorx is in the __________ stage of the product life cycle, the price of the medicine-flavoring system should be __________ than the price that would usually be charged. a. b. c. d. e. introductory; lower growth; lower introductory; higher growth; higher maturity; lower
Answer: c Page: 271 Rationale: Generally speaking, the newer a product is and the earlier it is in the product life cycle, the higher the price that can be charged for that product. First entrants into a market face limited competition for a time; until competitors enter the market; these products are the only products available to consumers, a form of short-term monopoly. Accordingly, until the competition catches up, consumers are more willing to pay higher prices for new productsthey have no other choice if they strongly desire the product. 12-152 PRICING CONSTRAINTS: DEMAND/PLC APPLICATION
Pharmacist and new father Kenneth Kramm wanted his son to take his medicine, but it was a battle. As a result Kramm developed FLAVORx, a liquid medicine-flavoring system that can mask the taste or smell of medicine. FLAVORx tastes of strawberry or grape and has no effect on the medicinal value of the drug to which it is added. Like Kramm, nearly all parents who came to the pharmacy for medicine for their children, requested FLAVORx. The demand for the product affects the __________; it should be __________ since there are no alternatives. a. b. c. d. e. product; regulated price; higher promotion; widespread price; lower price; regulated
Answer: b Page: 271 Rationale: The number of potential buyers affects the price a seller can charge. In this case, there are many potential buyers. Additionally, generally speaking, the newer a product is and the earlier it is in the product life cycle, the higher the price that can be charged for that product. Consumers are more willing to pay higher prices for new productsthey have no other choice if they strongly desire the product. The parents have no choice other than FLAVORx for their childrens medicine.
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12-153 PRICING CONSTRAINTS: COST OF PRODUCING Which of the following is true about production cost as a pricing constraint? a. b. c. d. e.
CONCEPTUAL
In the short run, a firms price must cover all the costs of producing a product. Covering the firms costs doesnt affect pricing the product at all. A firms costs set a floor under its price. A firms costs set a ceiling over its price. In the short run, a firms price must cover all the marketing costs of a product.
Answer: c Page: 271 Rationale: In the long run, a firms price must cover all the costs of producing and marketing a product. If the price doesnt cover these costs, the firm will fail; so in the long run, a firms costs set a floor under its price. 12-154 COMPETITORS' PRICES CONCEPTUAL
A manufacturing company that introduces a product must know or anticipate what specific price its __________ currently charge or will charge in the future. a. b. c. d. e. information technology departments subsidiary manufacturing divisions previous industry relations present and potential competitors government bureaus and labor unions
Answer: d Page: 272 Rationale: A firm must know or anticipate what specific price its present and potential competitors are charging now or will charge in the future. 12-155 LEGAL AND REGULATORY ASPECTS OF PRICING CONCEPTUAL
Which of the following statements about the legal and regulatory aspects of pricing is true? a. b. c. d. e. The Robinson-Patman Act deals with predatory pricing. The Consumer Goods Pricing Act is the only federal legislation that deals directly with pricing issues. The Sherman Act deals only with vertical price fixing. The Clayton Act, as amended by the Robinson-Patman Act, prohibits price discrimination. The Consumer Goods Pricing Act and the Robinson-Patman Act deal with price discrimination.
Answer: d Page: 272 Rationale: Predatory pricing is regulated by the Federal Trade Commission Act and the Sherman Act. In addition to the Consumer Goods Pricing Act, there is the Federal Trade Commission Act, the Robinson-Patman Act, and the Sherman Act, all of which deal with pricing issues. The Consumer Goods Pricing Act, not the Sherman Act, deals with vertical price fixing. Only the Robinson-Patman Act deals with price discrimination.
12-156 PRICE FIXING A conspiracy among firms to set prices for a product is termed: a. b. c. d. e. price discrimination. price fixing. predatory pricing. tying arrangements. exclusive dealing.
DEFINITION
Answer: b Page: 272 Rationale: Text term definitionprice fixing 12-157 PRICE FIXING Price fixing is: a. b. c. d. e. an arrangement a manufacturer makes with a reseller to handle only its products and not those of a competitor. the practice of charging a very low price for a product with the intent of driving competitors out of business. the practice of charging different prices to different buyers for goods of like grade and quality. a conspiracy among firms to set prices for a product. a seller's requirement that the purchaser of one product also buy another product in the line. DEFINITION
Answer: d Page: 272 Rationale: Text term definitionprice fixing 12-158 PRICE FIXING CONCEPTUAL
The customer is our enemy; the competitor is our friend. That's the unofficial world-view of $11-billion-in-sales Archer Daniels Midland (ADM), according to FBI mole-executive Mark Whitacre in an interview. Given this information, which of the following illegal pricing practices would ADM have been most likely to engage in? a. b. c. d. e. price fixing dynamic pricing price differentiation FOB origin pricing cost justification defense
Answer: a Page: 272 Other Location: web Rationale: Price fixing is a conspiracy among firms to set prices for a product. Because the quote refers to competitors as being friends, one can infer that firms may conspire together to set prices, resulting in higher prices for the customer and more profits for the competitors as well as ADM.
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12-159 PRICE-FIXING
APPLICATION
Mark Johnson, the manager of a discount consumer electronics store, has been approached by the manufacturer of a popular and profitable line of compact disk storage racks regarding the retail price charged for the racks at Johnson's store. The manufacturer's representative has implied that if Johnson doesn't raise the retail prices for the storage racks to those charged by the manufacturer's non-discount customers, Johnson's supply of racks may be severely curtailed. The manufacturer is guilty of attempting: a. b. c. d. e. horizontal price-fixing. resale price maintenance. price discrimination. predatory pricing. bait and switch pricing.
Answer: b Page: 272 Rationale: Resale price maintenance (also called vertical price fixing), illegal since 1975, involves controlling agreements between independent buyers and sellers (a manufacturer and a retailer) whereby sellers are required not to sell products below a minimum retail price. 12-160 PRICE DISCRIMINATION APPLICATION
In one of its least favorite actions, Amazon.com was caught fiddling with its price tags. Avid videodisc shoppers found that the online store was offering different customers different prices for the same DVD, and complained vociferously. Amazon was caught red-handed. It was, company officials admitted, trying to see how much it could charge for an item before shoppers balked. No matter what the reasoning behind it, Amazon.com was using: a. b. c. d. e. horizontal price-fixing. resale price maintenance. price discrimination. predatory pricing. bait and switch pricing.
Answer: c Page: 272 Rationale: Price discrimination the practice of charging different prices to different buyers for goods of like grade and quality. Amazon.com was selling the same DVD to different customers at different prices.
12-161 PRICE DISCRIMINATION Price discrimination is: a. b. c. d. e.
DEFINITION
an arrangement a manufacturer makes with a reseller to handle only its products and not those of a competitor. the practice of charging a very low price for a product with the intent of driving competitors out of business. the practice of charging different prices to different buyers for goods of like grade and quality. a conspiracy among firms to set prices for a product or service. a seller's requirement that the purchaser of one product also buy another product in the line.
Answer: c Page: 272 Rationale: Text term definitionprice discrimination 12-162 DECEPTIVE PRICING APPLICATION
A hardware store advertises a 3/8" Black and Decker Power Drill for $29.95. You enter the store intending to purchase the drill. The salesperson informs you that they are all sold out. She tells you that the "sale" drills were factory seconds and that if you are going to be doing any kind of serious woodworking, you should buy the Model 3309, which sells for $49.99. This scenario has elements of which type of deceptive pricing? a. b. c. d. e. comparable value comparisons former price comparisons comparisons with suggested prices conditional bargains bait and switch
Answer: e Page: 272 Rationale: This scenario has all the elements of bait and switch. Bait and switch is an example of deceptive pricing. This occurs when a firm offers a very low price on a product (the bait) to attract customers to a store. Once in the store, the customer is persuaded to purchase a higherpriced item (the switch) using a variety of tricks, including (1) degrading the promoted item and (2) not having the promised item in stock or refusing to take orders for it. In this case the store offers a product at a low price, is out of stock on the product, the salesperson tells you that the sale item was of inferior quality, and attempts to get you to buy a higher-priced model.
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12-163 DECEPTIVE PRICING
APPLICATION
Brake-O is a franchise company that repairs brakes in cars and trucks. A radio ad for the company warned potential customers to not fall prey to bait-and-switch schemes. The ad was telling potential customers to: a. b. c. d. e. report services that violate the Robinson-Patman Act. be wary of brake repair services that are priced low because the services may try to sell customers a much higher priced service once the customer enters the store. avoid doing businesses with services that have initiated a conspiracy among firms in its industry to set prices for a product or service. not do business at services that have arranged with a particular manufacturer that they will only buy from this manufacturer and from no other. avoid doing business with monopolistic competitors who are trying to start a price war.
Answer: b Page: 272 Rationale: Bait and switch is an example of deceptive pricing. This occurs when a firm offers a very low price on a product (the bait) to attract customers to a store. Once in the store, the customer is persuaded to purchase a higher-priced item (the switch) using a variety of tricks, including (1) degrading the promoted item and (2) not having the promised item in stock or refusing to take orders for it. In this case, Brake-O is telling the listener to be wary of brake repair services that are priced low (the bait) because the services may try to sell customers a much higher priced service (the switch) once the customer enters the store. 12-164 DECEPTIVE PRICING APPLICATION
To promote their business, some psychics advertise free tarot-card readings and other insights into their customers' futures on television. Unfortunately, this free reading has cost some unsuspecting callers as much as $700 in phone charges. This sort of deceptive pricing practice would be monitored by the: a. b. c. d. e. Consumer Protection Agency. U.S. Department of Justice. Federal Trade Commission. Federal Communications Commission. Telecommunications Commission.
Answer: c Page: 272 Rationale: Price deals that mislead consumers fall into the category of deceptive pricing. Deceptive pricing is outlawed by the Federal Trade Commission. In this case, suggesting that the readings are free on television and then costing callers very high phone charges is deceptive pricing since the consumers are mislead.
12-165 PREDATORY PRICING
DEFINITION
__________ is the practice of changing a very low price for a product with the intent of driving competitors out of business. a. b. c. d. e. Price fixing Price discrimination Predatory pricing Deceptive pricing Geographical pricing
Answer: c Page: 272 Rationale: Text term definitionpredatory pricing 12-166 PREDATORY PRICING APPLICATION
In the early 1980s, typical round trip coach fares from the East Coast to London were over $500. Then Freddie Laker introduced a competing service from the East Coast (Newark, NJ) to London at $350. Major airlines matched his price with more serviceand continued to do so until they drove Laker out of business. Then prices shot back up to over $500. A lawsuit filed resulted in the judgment that the major airlines had explicitly tried to destroy a competitor. The action of the major airlines in this example is an example of: a. b. c. d. e. price fixing. price discrimination. predatory pricing. deceptive pricing. pricing constraints.
Answer: c Page: 272 Rationale: Predatory pricing is charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices. Proving the presence of this practice has been difficult and expensive because it must be shown that the predator explicitly attempted to destroy a competitor and the predatory price was below the defendants average cost. In this case, the airlines matched Lakers prices with better service until they drove Laker out of business. They then raised prices on the route to previous levels.
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12-167 PREDATORY PRICING Predatory pricing is: a. b. c. d. e.
DEFINITION
an arrangement a manufacturer makes with a reseller to handle only its products and not those of a competitor. the practice of charging a very low price for a product with the intent of driving competitors out of business. the practice of charging different prices to different buyers for goods of like grade and quality. a conspiracy among firms to set prices for a product or service. a seller's requirement that the purchaser of one product also buy another product in the line.
Answer: b Page: 272 Rationale: Text term definitionpredatory pricing 12-168 PREDATORY PRICING APPLICATION
Bob Biltmore owns dozens of very successful print shops throughout the Midwest. Biltmore's shops specialize in low cost black and white copies and feature user-friendly machines consumers can easily operate. In recent months, Biltmore has noticed many more competitors in the areas where his stores are located. In an attempt to eliminate the competition, Biltmore has decided to charge a very low price for his black and white copies, a price so low his competitors will be forced out of business. After the competition has been driven out, Biltmore plans to raise the price of his copies. Biltmore is planning to engage in the illegal practice of: a. b. c. d. e. price fixing. price inflation. predatory pricing. competitive pricing. price flighting.
Answer: c Page: 272 Rationale: Predatory pricing is charging a very low price for a product with the intent of driving competitors out of business. Once competitors have been driven out, the firm raises its prices. Proving the presence of this practice has been difficult and expensive because it must be shown that the predator explicitly attempted to destroy a competitor and the predatory price was below the defendants average cost. In this case, Biltmore is planning to charge a very low price until competitors are forced out of business. Then he plans on raising the price of his copiesthe definition of predatory pricing.
12-169 SELECT AN APPROXIMATE PRICE LEVEL Which of the following is true when selecting an approximate price level? a. b. c. d. e.
CONCEPTUAL
The marketing manager must understand the marketing environment. The marketing manager must understand the goals of the firm. A balance must be struck between factors that might drive a price higher and other forces that may drive a price down. Marketing managers consider pricing objectives and constraints first, before choosing the general pricing approach they will use to arrive at an approximate price level. All of the above statements are true when selecting an approximate price level.
Answer: e Page: 273 Rationale: Before setting a final price, the marketing manager must understand the market environment, the features and customer benefits of the particular product, and the goals of the firm. A balance must be struck between factors that might drive a price higher (such as a profitoriented approach) and other forces (such as increased competition from substitutes) that may drive a price down. Marketing managers consider pricing objectives and constraints first, then choose among the general pricing approachesdemand-, cost-, profit-, or competition-oriented to arrive at an approximate price level. This price is then analyzed in terms of cost, volume, and profit relationships. Break-even analyses may be run at this point, and finally if this approximate price level works, it is time to set a specific list or quoted price. 12-170 SETTING THE LIST OR QUOTED PRICE CONCEPTUAL
Which of the following statements is true with respect to setting the list or quoted price? a. b. c. d. e. One should consider that demand is unrelated to price. The only policy used to set list prices is the one-price policy. The only policy used to set list prices is the flexible-price policy. The step of setting the list or quoted price follows selecting an approximate price level. Consumers do not use price as an indication of quality.
Answer: d Page: 273 Rationale: When setting a final price, an approximate price level should be chosen prior to setting the list or quoted price (alternative d). Demand can be related to price rather than unrelated as stated in alternative a. Two policies may be used to set list prices: the one-price policy and the flexible-price policy. Finally, many times consumers do use price as an indication of quality, especially if they cannot judge quality by other means.
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12-171 ONE-PRICE POLICY
APPLICATION
A radio advertisement features a female buyer who is very enthusiastic about the pricing policies of the Saturn automobile dealers. In the testimonial-type advertisement, the car buyer laments about the difficulty she experienced with other car dealers in haggling over a final price for an auto. In comparison, the buyer touts the ease with which she arrived at a final price for her new Saturn automobileshe simply entered the show room, asked for the price of the car she preferred, and the sales person quoted her the selling price. No matter which Saturn dealer she visited, the buyer (or any other buyer for that matter) would be quoted the same price for the same automobile. The advertisement represents Saturn's __________ policy. a. b. c. d. e. flexible-price standard-price fixed-price one-price sticker-price
Answer: d Page: 273 Rationale: A one-price policy involves setting one price for all buyers of a product or service. Saturn Corporation uses this approach in its stores and features a no haggle, one price price for its cars. 12-172 ONE-PRICE POLICY DEFINITION
A __________ policy involves setting one price for all buyers of a product or service. a. b. c. d. e. customary pricing one-price flexible-price standard markup blanket price
Answer: b Page: 273 Rationale: Text term definitionone-price policy 12-173 ONE-PRICE POLICY CONCEPTUAL
When you buy a Wilson Sting tennis racket from a discount store, you are offered the product at a single price. You can buy it or not, but there is no variation in price under the seller's: a. b. c. d. e. penetration strategy. odd-even pricing. one-price policy. bundle-pricing policy. flexible-price policy.
Answer: c Page: 273 Rationale: A one-price policy involves setting one price for all buyers of a product or service. The discount store only offers one price for the tennis racket.
12-174 FLEXIBLE-PRICE POLICY
DEFINITION
A __________ involves setting different prices for products and services depending on individual buyers and purchase situation in light of demand, cost, and competitive factors. a. b. c. d. e. price lining policy customary pricing policy a flexible-price policy price fixing policy discretionary pricing policy
Answer: c Page: 273 Rationale: Text term definitionflexible-price policy 12-175 FLEXIBLE-PRICE POLICY Which of the following statements about a flexible-price policy is true? a. b. c. d. e. Dell Computer uses a flexible-price policy. A flexible-price policy may be used when selling a house. This flexible-price policy may be used when selling a car. Flexible pricing may result in race and gender discrimination. All of the above statements about a flexible-price policy are true. CONCEPTUAL
Answer: e Page: 273 Rationale: While a flexible-price policy may be used in selling products like houses or cars, it runs the risk of discrimination against the buyer. Dell Computer uses a flexible-price policy to allow it to be priced differently even within a day. This practice is becoming more popular due to improvements in pricing software. 12-176 FLEXIBLE-PRICE POLICY Yield management pricing is a form of: a. b. c. d. e. fixed-pricing loss-leader pricing. a flexible price policy. customary pricing. price lining. DEFINITION
Answer: c Page: 273 Rationale: A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchase situation in light of demand, cost, and competitive factors. Yield management, used especially in the airline industry, sets different prices for airline service depending on the purchase situation (business or pleasure travel) or competitive factors (what other airlines are charging on the same route), for example.
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12-177 FLEXIBLE-PRICE POLICY
APPLICATION
When Teresa went into the furniture store to buy a new sleeper sofa, she thought the prices quoted by the salesperson were too high, so she prepared to leave. As she neared the door, the salesperson asked if she would be interested in buying the sofa if the price was $150 lower. Teresa returned to the store, purchased the sofa, and felt like she had gotten a good deal. The furniture store uses: a. b. c. d. e. price lining. customary pricing. a flexible-price policy. price fixing. discretionary pricing.
Answer: c Page: 273 Rationale: A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchase situation in light of demand, cost, and competitive factors. With a flexible-price policy, the furniture store could offer the sofa to similar customers but at different prices. 12-178 ETHICS AND SOCIAL RESPONSIBILITY ALERT CONCEPTUAL
Pricing software often called price optimization technology, is used at various retailers such as The Gap and Eddie Bauer. This allows the price for the same clothing to be priced at different levels depending on the day of the week. This practice is known as a: a. b. c. d. e. one-price policy. quantity discounting policy. seasonal discounting policy. fixed pricing policy. flexible-price policy.
Answer: e Page: 274 Rationale: A flexible-price policy involves setting different prices for products and services depending on individual buyers and purchase situation in light of demand, cost, and competitive factors. Pricing software allows flexible pricing to be accomplished easily. The goal of this software is to increase margins and profitability for the retailers and reduce average inventory by deciding when exactly to put merchandise on sale to clear the shelves. Because the price can be changed using this software, the retailers are practicing a flexible-price policy.
12-179 TYPES OF DISCOUNTS Four types of price discounts are: a. b. c. d. e. quantity, trade-in, promotional, and cash. seasonal, functional, cash, and quantity. quantity, seasonal, promotional, and cash. cash, trade-in, seasonal, and promotional. trade-in, promotional, geographic, and functional.
DEFINITION
Answer: b Page: 274 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Four kinds of discounts are especially important in marketing strategy: (1) quantity, (2) seasonal, (3) trade or functional, and (4) cash. 12-180 QUANTITY DISCOUNTS Reductions in unit cost for a larger order are: a. b. c. d. e. promotional allowances. quantity discounts. one-price policy prices. penetration prices. size of order allowances. DEFINITION
Answer: b Page: 274 Rationale: Text term definitionquantity discounts 12-181 QUANTITY DISCOUNTS CONCEPTUAL
Your local instant photocopying service charges 10 cents a copy for copies up to a quantity of 25, 9 cents a copy for 26 to 100 copies, and 8 cents a copy for 101 or more copies. What kind of adjustment to list or quoted prices is the photocopying service using? a. b. c. d. e. bundle pricing quantity discounts loss-leader pricing promotional discounts everyday low pricing
Answer: b Page: 274 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Quantity discounts, or reductions in unit costs for a larger order, are used to encourage customers to buy larger quantities of a product. This is why the price drops when a customer buys more copies.
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12-182 QUANTITY DISCOUNTS
APPLICATION
If you buy one pair of Uvex Clear UVExtreme safety eyewear, the cost is $7.40, but if you buy ten at one time, the price per pair is reduced to $6.85. This is an example of a: a. b. c. d. e. promotional allowance. quantity discount. bundle pricing. functional discount. one-price policy.
Answer: b Page: 274 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Quantity discounts, or reductions in unit costs for a larger order, are used to encourage customers to buy larger quantities of a product. In this case the buyer is encouraged to buy ten pairs of eyewear at a time because the price drops the more the customer buys. 12-183 QUANTITY DISCOUNTS APPLICATION
Mike Morgan, a sales representative for a major distributor of Kodak film, wanted to encourage large purchases by his customers. In order to accomplish this objective, Morgan offered the following discount to his customers: 10-50 cases of filma 10 percent discount, 51-100 cases of filma 12 percent discount, 101-200 cases of filma 15 percent discount. What type of discount was Morgan offering his customers? a. b. c. d. e. a seasonal discount a cumulative seasonal discount a quantity discount a trade discount a noncumulative trade discount
Answer: c Page: 274 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Quantity discounts, or reductions in unit costs for a larger order, are used to encourage customers to buy larger quantities of a product as is the case with the film distributor.
12-184 SEASONAL DISCOUNT Manufacturers use seasonal discounts to: a. b. c. d. e.
CONCEPTUAL
entice dealers to purchase seasonal merchandise earlier than their normal demand would require. rid themselves of dated merchandise. prolong the peak seasonal selling season. "load up" their dealers. show consumers holiday goodwill.
Answer: a Page: 275 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Seasonal discounts encourage the buyer to stock inventory earlier than normal demand would require. This enables the manufacturer to reduce seasonal peaks and troughs in production and rewards the retailer by allowing them to have supplies in stock at the time they are wanted by customers. 12-185 SEASONAL DISCOUNT CONCEPTUAL
To encourage buyers to stock inventory earlier than their normal demand would require, manufacturers often use: a. b. c. d. e. noncumulative discounts. cumulative discounts. seasonal discounts. trade discounts. functional discounts.
Answer: c Page: 275 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Seasonal discounts encourage buyers to stock inventory earlier than their normal demand would require. This enables the manufacturer to reduce seasonal peaks and troughs in production and rewards the retailer by allowing them to have supplies in stock at the time they are wanted by customers.
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12-186 SEASONAL DISCOUNT
APPLICATION
When purchasing which one of the following products would you be likely to receive a seasonal discount? a. b. c. d. e. an engraved silver picture frame a ream of computer printer paper a mystery novel a can of Italian-cut green beans none of the above
Answer: e Page: 275 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Seasonal discounts encourage buyers to stock inventory earlier than their normal demand would require. This enables the manufacturer to reduce seasonal peaks and troughs in production and rewards the retailer by allowing them to have supplies in stock at the time they are wanted by customers. Seasonal discounts are given on products like Christmas decorations, swimsuits, and wood burning stoves that have seasonal spikes in demand. The products listed would not have a primary (seasonal) selling season. 12-187 TRADE DISCOUNT Trade discounts are given to: a. b. c. d. e. take business away from competitors. reward wholesalers and retailers for functions they have performed in the past. resellers on the basis of where they are in the channel of distribution. keep the prices offered the same. all of the above CONCEPTUAL
Answer: c Page: 275 Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Trade or functional discounts are offered to resellers in the channel of distribution on the basis of (1) where they are in the channel and (2) the marketing activities they are expected to perform in the future. Only alternative c is correct. 12-188 CASH DISCOUNT To encourage retailers to pay their bills quickly, manufacturers offer them: a. b. c. d. e. quantity discounts. flexible pricing policies. promotional allowances. cash discounts. manufacturers' inducements. DEFINITION
Answer: d Page: 275 Rationale: Text term definitioncash discounts
12-189 CASH DISCOUNT
APPLICATION
If an invoice for $45,000 is billed 2/10 net 30, what is the highest annual interest rate that one would rationally pay to borrow money in order to take advantage of the cash discount if the only consideration is a lower annual interest rate than charged on the invoice? a. b. c. d. e. 71.9 percent 9.9 percent 17.9 percent 23.9 percent 35.9 percent
Answer: e Page: 275 Rationale: A cash discount encourages retailers to pay their bills quickly. 2 percent for 20 days is an annual percentage rate of 36 percent. So the highest annual interest rate below 36 percent is rational, 35.9 percent here. 12-190 CASH DISCOUNT APPLICATION
Rick's Bike Shop allows customers to use a credit card for purchases. The shop pays 3 percent of the sale to the credit card company. To promote more business, Rick decides to offer a lower price to customers paying cashthat price being 3 percent less than the standard list price. Rick is giving his customers a(n): a. b. c. d. e. functional discount. trade-in allowance. promotional allowance. discount-for-cash. everyday low price.
Answer: d Page: 275 Rationale: Retailers provide cash discounts to consumers to eliminate the cost of credit granted to consumers. Rick is providing a cash discount to customers equal to the cost of credit. This discount takes the form of a discount-for-cash policy. 12-191 CASH DISCOUNT APPLICATION
When Sherman bought gas, he noticed the convenience store offered him a 3 percent reduction in price if he paid cash rather than used his credit card. The convenience store was offering him a: a. b. c. d. e. trade discount. cash discount. promotional allowance. rebate. functional discount.
Answer: b Page: 275 Rationale: Retailers provide cash discounts to customers to eliminate the cost of credit granted to consumers. The convenience store offered Sherman a cash discount equal to three percent.
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12-192 TRADE-IN ALLOWANCE
APPLICATION
A new car dealer can offer a substantial reduction in the list price of a new Ford pickup truck by offering you a __________ of $3,000 for your 1988 Camaro. a. b. c. d. e. cash discount functional discount seasonal discount trade-in allowance promotional allowance
Answer: d Page: 275 Rationale: Allowances are reductions from list or quoted prices to buyers for performing some activity. A trade-in allowance is a price reduction given when a used product is part of the payment on a new product. Trade-ins are an effective way to lower the price a buyer has to pay without formally reducing the list price. 12-193 PROMOTIONAL ALLOWANCE DEFINITION
The cash payment or extra amount of "free goods" awarded sellers in the channel of distribution for undertaking certain advertising or selling activities to promote the product is a: a. b. c. d. e. quantity discount. flexible pricing policy. promotional allowance. payoff. manufacturer's inducement.
Answer: c Page: 275 Rationale: Text term definitionpromotional allowance 12-194 EVERYDAY LOW PRICING DEFINITION
The practice of replacing promotional allowances with lower manufacturer list prices is called: a. b. c. d. e. everyday low pricing. FOB origin pricing. trade-in allowances. single-zone pricing. basing-point pricing.
Answer: a Page: 275 Rationale: Text term definitioneveryday low pricing
12-195 EVERYDAY LOW PRICING
CONCEPTUAL
Which of the following statements about everyday low pricing (EDLP) is true? a. b. c. d. e. EDLP encourages manufacturer allowances. Supermarkets have hailed EDLP as value pricing at its most effective. EDLP promises to reduce the average price to consumers while minimizing promotional allowances given by manufacturers. EDLP allows supermarkets to use deeply discounted price specials. EDLP can increase average retail prices by as much as 10 percent.
Answer: c Page: 275 Rationale: EDLP eliminated manufacturer allowances. EDLP does not allow supermarkets to use deeply discounted price specials known as Hi-Lo pricing. Manufacturers refer to EDLP as value pricing, and supermarkets call it everyday low profits. EDLP can reduce average retail prices by as much as 10 percent. Thus, only alternative c is correct. 12-196 GEOGRAPHICAL ADJUSTMENTS Geographic adjustments are made by manufacturers or wholesalers to cover: a. b. c. d. e. production costs. administrative costs. promotional costs. variable costs. transportation costs. CONCEPTUAL
Answer: e Page: 276 Rationale: Geographic adjustments are made by manufacturers or wholesalers to list or quoted prices to reflect the cost of transportation of the products from seller to buyer. 12-197 FOB ORIGIN PRICING FOB origin pricing is a method of pricing where: a. b. c. d. e. title of goods remains with the manufacturer until sold to the ultimate consumer. title of goods passes to the buyer upon arrival at the final destination. title of goods passes to the buyer at the point of loading. the price the seller sets includes all transportation costs. title of goods passes to the buyer when the state boundary is crossed. DEFINITION
Answer: c Page: 276 Rationale: Text term definitionFOB origin pricing
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12-198 FOB ORIGIN PRICING
APPLICATION
Central Ice Machine Company, located in Omaha, Nebraska, sells Frick, Sullair, York, and Fes Fuller ammonia refrigeration parts. The company ships using FOB origin pricing. Which of the following statements about the shipment of a Frick reciprocating compressor is true? a. b. c. d. e. All buyers will pay no shipping costs because they are paid by Central Ice Machine. Central Ice Machine pays the same amount as the buyer no matter where the compressor is shipped. It will cost Central Ice Machine more to ship to Charlotte, North Carolina than to Topeka, Kansas. A buyer in Albany, New York, will pay significantly more shipping charges than a buyer in Lincoln, Nebraska, and Central Ice Machine will pay none. All buyers will pay the same shipping costs, and Central Ice Machine will pay none.
Answer: d Page: 276 Rationale: FOB origin pricing means the seller pays the cost of loading the product onto the vehicle that is used for transportation. The title to the goods passes to the buyer at the point of loading, so the buyer becomes responsible for picking the specific mode of transportation, for all the transportation costs, and for subsequent handling of the product. Buyers farthest from the seller face the big disadvantage of paying the higher transportation costs. Thus a buyer in Albany, NY will pay more shipping charges than a buyer in Lincoln, Nebraska and with FOB origin pricing, Central Ice Machine will not be paying shipping costs at all. 12-199 FOB ORIGIN PRICING DEFINITION
When buyers and sellers are separated by vast distances, geographical adjustments may be made to reflect the cost of transportation of the products from sellers to buyers. Which method of quoting prices would be chosen by a seller who wants to maximize profits? a. b. c. d. e. uniform delivered pricing single-zone pricing multiple-zone pricing FOB origin pricing FOB buyer's location
Answer: d Page: 276 Rationale: FOB origin pricing means the seller pays the cost of loading the product onto the vehicle that is used for transportation. The title to the goods passes to the buyer at the point of loading, so the buyer becomes responsible for picking the specific mode of transportation, for all the transportation costs, and for subsequent handling of the product. Buyers farthest from the seller face the big disadvantage of paying the higher transportation costs. Thus, the seller has maximized profit, with no added costs for freightand no geographical adjustments. However, a competitor may offer some kind form of delivered pricing method, so the seller may need to adjust this policy.
12-200 FOB ORIGIN PRICING
CONCEPTUAL
The fashion buyer for Neiman Marcus is in Italy to view the new collections and to order for the coming season. In Milan, she negotiates a good price for a quantity of shoes in a range of sizes and styles, FOB factory. This means that: a. b. c. d. e. the factory selects the mode of transportation, pays freight charges, and is responsible for any damage because the seller retains title to the goods until they are delivered to Neiman Marcus. Neiman Marcus selects the mode of transportation, pays freight charges, and is responsible for any damage while the shoes are in transit because title passed to the buyer at the point of loading. Neiman Marcus and the factory split freight costs. the factory pays freight to the U.S., Neiman Marcus pays freight within the U.S. the factory passes the title when the goods are loaded, but will pay all shipping costs.
Answer: b Page: 276 Rationale: FOB origin pricing means the seller pays the cost of loading the product onto the vehicle that is used for transportation. The title to the goods passes to the buyer at the point of loading, so the buyer becomes responsible for picking the specific mode of transportation, for all the transportation costs, and for subsequent handling of the product. Buyers farthest from the seller face the big disadvantage of paying the higher transportation costs. With FOB factory (FOB origin pricing) the title to the goods passes to the buyer at the point of loading, so Neiman Marcus becomes responsible for picking the specific mode of transportation, for all the transportation costs, and for subsequent handling of the shoes. 12-201 UNIFORM DELIVERED PRICING Uniform delivered pricing means: a. b. c. d. e. title of goods remains with the manufacturer until sold to the ultimate consumer. pricing and title of goods passes to the buyer upon arrival at final destination. title of the goods passes to the buyer at the point of shipment. the price the seller sets includes all transportation costs. title of goods passes to the buyer when the state boundary is crossed. DEFINITION
Answer: d Page: 276 Rationale: Text term definitionuniform delivered pricing
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12-202 VIDEO CASE: WASHBURN INTERNATIONAL
CONCEPTUAL
Because the guitars made by Washburn International, Inc. are endorsed by internationally known musicians, the owner of the company believes this reduces the price elasticity for the guitars. This means: a. b. c. d. e. slight increases in price will decrease demand for the Washburn guitar. slight increases in prices will have no effect on demand for the Washburn guitar. the buyers of the Washburn guitar are extremely price sensitive. the demand for the guitar will stay the same no matter what the price increase. the buyers of the Washburn guitar are completely price sensitive.
Answer: b Page: 278 Rationale: A reduction of price elasticity does not mean an elimination of price sensitivity. But Washburn believes that having well-known endorsees of its guitars will make prospective buyers less sensitive to slight price increases. In other words, an increase in price will not reduce the demand for the Washburn guitar. 12-203 VIDEO CASE: WASHBURN INTERNATIONAL APPLICATION
The executive vice president of Washburn, Inc. has set a sales target of 2,000 units for a new line of guitars. This type of objective is most closely related to a(n) __________ pricing objective. a. b. c. d. e. profit target return unit volume market share survival
Answer: c Page: 278 Rationale: Setting a target of selling 2,000 of the new guitars is clearly a pricing objective based on unit volume 12-204 VIDEO CASE: WASHBURN INTERNATIONAL APPLICATION
The average price Washburn charges for a guitar is $329. This price must cover its average costs of $25 for materials and $112 for direct labor. It must also cover fixed expenses of $32,000 Assuming everything else stays the same, the company's planned move to Nashville, Tennessee, will reduce its fixed costs by $4,800. This would cause the break-even quantity to __________. a. b. c. d. e. decrease increase stay the same slowly increase, then decrease not move in any of the above ways
Answer: a Page: 278 Rationale: Since the break-even point is found by dividing fixed cost by price minus unit variable cost, and since the fixed cost is being reduced, then the break-even point will also be reduced.
CHAPTER 12 PRICING PRODUCTS AND SERVICES SHORT ESSAY QUESTIONS

12-205 VALUE How do consumers use price as an indicator of value? Answer: Consumers often use price as a basis for determining a product's valuesuggesting a relationship between price and perceived quality of an item in their minds. This relationship is described in the definition of value: Value = Perceived Benefits / Price. So, for a given price, as perceived benefits increase, value increases. Page: 259 12-206 APPROXIMATE PRICE LEVEL DEFINITION CONCEPTUAL
What are the four common approaches used by managers to help them find an approximate price level? Answer: Four common approaches to helping find this approximate price level are: 1) demand-based 2) cost-based 3) profit-based 4) competition-based methods. Page: 260 12-207 SKIMMING PRICING When is skimming pricing an effective strategy? Answer: Skimming pricing is an effective strategy when: 1) enough prospective customers are willing to buy the product immediately at the high initial price to make those sales profitable 2) the high initial price will not attract competitors 3) lowering price has only a minor effect on increasing the sales volume and reducing unit costs 4) customers interpret the high price as signifying high quality. Page: 260 CONCEPTUAL
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12-208 PENETRATION PRICING What are the conditions favoring the use of penetration pricing?
CONCEPTUAL
Answer: The conditions favoring penetration pricing are: (1) many segments of the market are price sensitive 2) a low initial price discourages competitors from entering the market 3) unit production and marketing costs fall dramatically as production volumes increase. Page: 260 12-209 ODD-EVEN PRICING Explain why odd-even pricing is sometimes called psychological pricing. Answer: Odd-even pricing presumes that customers, when looking at an item marked $299.99, will see the price as something over $200 rather than about $300. This customer reaction is psychologicallyoriented. Page: 261 12-210 LOSS-LEADER PRICING What is a loss-leader and why is it used by retailers? Answer: For a special promotion many retail stores deliberately sell a product below its customary price to attract attention to it. The purpose of this loss-leader pricing strategy is not to increase sales of the specific advertised product, but to attract customers in hopes they will buy other products as well, particularly discretionary items carrying large markups. Page: 265 12-211 FACTORS AFFECTING DEMAND List four key factors used to estimate demand. Answer: Of course price is one factor. However, price is not the complete story in estimating demand. Economists stress three other key factors: consumer tastes (depend on many factors such as demographics, culture, and technology), price and availability of other products, and consumer income. Page: 265 CONCEPTUAL CONCEPTUAL CONCEPTUAL
12-212 DEMAND CURVE BEHAVIOR
CONCEPTUAL
What is the difference between a movement along a demand curve and a shift of a demand curve? Answer: A movement along a demand curve assumes that other factors (consumer tastes, price and availability of substitutes, and consumer income) remain unchanged. A shift of demand occurs when one or more of those factors change. Page: 266 12-213 PRICE ELASTICITY Explain why price elasticity is important to marketing managers. Answer: Price elasticity of demand is important to marketing managers because of its relationship to total revenue. With elastic demand, total revenue increases when price decreases, but decreases when price increases. With inelastic demand, total revenue increases when price increases and decreases when price decreases. Page: 266-267 12-214 FIXED AND VARIABLE COSTS What is the difference between fixed cost and variable cost? Answer: Fixed cost is the sum of the expenses of the firm that are stable and do not change with the quantity of product that is produced and sold. Variable cost is the sum of expenses of the firm that vary directly with quantity of product that is produced and sold. Page: 268 DEFINITION CONCEPTUAL
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12-215 BREAK-EVEN POINT
APPLICATION
Marketing managers often use break-even analysis to analyze the relationship between total revenue and total cost to determine profitability at various levels of output. What is the breakeven formula? Use the formula to calculate how many compact disc players a dealer must sell if her fixed costs are $6,000, unit variable costs are $140, and the selling price is $200. Answer: The Break-Even Point (BEP) is the quantity at which total revenue and total cost are equal and beyond which profit occurs.
BEP = BEP =
Fixed cost Unit price - Unit Variable Cost 6,000 = 100 compact disc players 200 - 140
Page: 268-269 12-216 PRICING OBJECTIVES DEFINITION
What are the six broad objectives that an organization may pursue which tie in directly to the organization's pricing policies? Answer: The six broad objectives that an organization may pursue which relate directly to the organization's pricing policies are profit, sales, market share, unit volume, survival, and social responsibility. Page: 270 12-217 PRICING CONSTRAINTS Describe the pricing constraints a firm is likely to face. Answer: Pricing constraints are factors that limit the range of prices a firm may set. Consumer demand for the product clearly affects the price that can be charged. Other constraints are set by factors within the organization: newness of the product and cost of producing and marketing the product. Competitive factors such as competitors prices, and legal and ethical considerations also restrict an organization's ability to set price. Page: 271 CONCEPTUAL
12-218 PREDATORY PRICING What is predatory pricing?
DEFINITION
Answer: Predatory pricing is the practice of charging a very low price for a product with the intent of driving competitors out of business. Then once the competition is out of business, raising the price to a high level. Page: 272 12-219 ONE-PRICE AND FLEXIBLE-PRICE POLICIES What is the difference between a one-price policy and a flexible-price policy? Answer: A one-price policy is setting the same price for all buyers of a product or service. In contrast, a flexible-price policy involves setting different prices for products and services depending on individual buyers and purchase situation in light of demand, cost, and competitive factors. Page: 273 12-220 DISCOUNTS DEFINITION DEFINITION
What are discounts? List the four kinds that are especially important in marketing strategy. Answer: Discounts are reductions from list price that a seller gives a buyer as a reward for some activity of the buyer that is favorable to the seller. Four kinds of discounts are especially important in marketing strategy. They are: 1) quantity discounts 2) seasonal discounts 3) trade (functional) discounts 4) cash discounts. Page: 274-275
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12-221 GEOGRAPHICAL ADJUSTMENTS
CONCEPTUAL
What are the two general methods for quoting prices related to transportation costs? Explain how each is used. Answer: The two general methods for quoting prices related to transportation costs are: 1) FOB origin pricing 2) uniform delivered pricing. FOB means "free on board" some vehicle at some location, which means the seller pays the cost of loading the product onto the vehicle that is used (such as a barge, railroad car, or truck). FOB origin pricing usually involves the seller naming the location of the loading as the seller's factory or warehouse. The title to the goods passes to the buyer at the point of loading, so the buyer becomes responsible for picking the specific mode of transportation, for all the transportation costs, and for subsequent handling of the product. When a uniform delivered pricing method is used, the price the seller quote includes all transportation costs. It is quoted in a contract as FOB buyers location, and the seller selects the mode of transportation, pays the freight charges, and is responsible for any damage that may occur because the seller retains title to the goods until delivered to the buyer. Page: 276

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Chapter 12 PRICING PRODUCTS AND SERVICES Test Item Table

4, 14, 205, 207, 208

6, 10, 15, 16, 20

CHAPTER 12 PRICING PRODUCTS AND SERVICES MULTIPLE CHOICE QUESTIONS

Answer: d Page: 258 Rationale: Key term definitionprice

12-10 PRICE EQUATION

Answer: b Page: 259 Rationale: Text term definitionvalue-pricing

12-17 PROFIT EQUATION

12-20 PROFIT EQUATION

Answer: a Page: 260 Rationale: Text term definitionskimming pricing

12-25 SKIMMING PRICING

12-27 SKIMMING PRICING

12-29 PENETRATION PRICING

12-35 PRESTIGE PRICING

12-37 PRESTIGE PRICING

12-40 PRESTIGE PRICING

12-43 ODD-EVEN PRICING

Answer: b Page: 261 Rationale: Text term definitiontarget pricing

12-46 TARGET PRICING

Answer: c Page: 261 Rationale: Text term definitionbundle pricing

12-49 BUNDLE PRICING

12-52 MARKETING NEWSNET

Answer: c Page: 262 Rationale: Text term definitionyield management pricing

12-55 YIELD MANAGEMENT PRICING

12-57 STANDARD MARKUP PRICING Standard markup pricing: a. b. c. d. e.

12-60 STANDARD MARKUP PRICING

12-66 TARGET PROFIT PRICING

12-69 TARGET RETURN-ON-INVESTMENT PRICING Target return-on-investment pricing is: a. b. c. d. e.

Answer: e Page: 264 Rationale: Penetration pricing is a demand-oriented approach to pricing.

12-72 CUSTOMARY PRICING Customary pricing is: a. b. c. d. e.

12-75 CUSTOMARY PRICING

12-77 ABOVE-MARKET PRICING

12-79 BELOW-MARKET PRICING

12-82 LOSS-LEADER PRICING

12-85 DEMAND CURVE

Answer: c Page: 265 Rationale: Text term definitiondemand factors

12-90 DEMAND FACTORS

12-93 PRICE ELASTICITY OF DEMAND

Answer: b Page: 266 Rationale: Text term definitionprice elasticity of demand

12-96 PRICE ELASTICITY OF DEMAND

12-98 ELASTIC DEMAND

12-100 INELASTIC DEMAND Inelastic demand exists when a(n): a. b. c. d. e.

12-102 TOTAL REVENUE

12-105 FIXED COST Fixed cost refers to: a. b. c. d. e.

12-108 FIXED COST

Answer: e Page: 268 Rationale: Key term definitionvariable cost

12-111 VARIABLE COST

12-114 BREAK-EVEN ANALYSIS

12-116 BREAK-EVEN ANALYSIS: PROFIT

12-118 BREAK-EVEN ANALYSIS

12-120 BREAK-EVEN ANALYSIS

12-122 BREAK-EVEN ANALYSIS

12-124 BREAK-EVEN ANALYSIS

12-126 BREAK-EVEN ANALYSIS

12-128 BREAK-EVEN ANALYSIS

12-130 BREAK-EVEN ANALYSIS Break-even analysis is: a. b. c. d. e.

Answer: a Page: 268-269 Rationale: Text term definitionbreak-even point

Answer: c Page: 270 Rationale: Key term definitionpricing objectives

12-145 PRICING OBJECTIVES: SOCIAL RESPONSIBILITY

Answer: d Page: 271 Rationale: Key term definitionpricing constraints

12-148 PRICING CONSTRAINTS

12-151 PRICING CONSTRAINTS: STAGE IN PRODUCT LIFE CYCLE