MKTG 101 CHP 18 FINAL EXAM PREP
A company has total fixed cost of $500,000. Its per unit variable cost is $5.00, and its price per unit is $10.00. What is the break-even point in sales dollars?
$1,000,000
It costs the producer of a coffee maker $44 to make each one. The producer charges wholesale distributors $55 for each coffee maker purchased. The producer's markup in dollars is ________, and in percentage terms, is ________.
$11 ; 20% (selling price - production price) ; (markup / selling price)
What is Average Cost?
(per unit) total cost / related quantity
What is Average Fixed Cost?
(per unit) total fixed cost / related quantity
What is Average Variable Cost?
(per unit) total variable cost / related quantity
What are the types of costs?
- Total Variable Cost - Total Cost - Average Cost - Average Fixed Cost - Average Variable Cost - Total Fixed Cost
What are the different types of Demand - Oriented methods?
- Value-in-Use - Auctions - Sequential Reductions - Subscription - Reference - Leader & Bait - Psychological - Odd-Even - Price Lining - Demand-Backward - Prestige
What are the keys to successful pricing?
- an accurate estimate of what constitutes an acceptable price and making sure the firm can still cover its costs
What are the factors that affect Price Sensitivity?
1) are there substitutes? 2) is it easy to compare prices? 3) who pays the bill? 4) how great is the total expenditure? 5) how significant is the end benefit? 6) How great are the switching costs?
How do you compute the Break-even point (BEP)?
1) determine the fixed cost contribution per unit 2) Find the BEP in units (Total fixed cost / contribution per unit) or in dollars (BEP in units x selling price per unit)
A clothing retailer charged $300 for a man's suit after getting it from the wholesaler for $150. The retailer's markup percentage is:
50%
A store advertised a special sale on new smart TVs and offered an exceptionally low price. Mary went to the store to purchase one. When she got there, the salesperson used high-pressure tactics to try and get her to buy a higher-priced model. When Mary insisted on looking at the advertised TV, the salesperson said that the advertised TV was not in stock. Mary left the store, concluding that the store was engaged in:
Bait Pricing
Are inventory carrying costs fixed or variable?
Both
What does the Break-even analysis allow marketing managers to do?
Compare the ramifications of different prices on the BEP
What type of tool is Break-even Analysis?
Cost-oriented
What types of items is Prestige pricing common for?
Furs Jewelry Perfume
What are two Operating Costs?
Gross Margin Net Margin
Net Margin =
Gross Margin - Fixed Costs
Markups guide pricing by ____________.
Intermediaries
Do marketing managers usually price one item at a time or more than one?
More than one or a full line
Gross Margin =
Net Sales - COGS
What pioneered subscription pricing?
Newspapers and Magazines
Leonard says that he always buys the highest-priced product in a given product category. "You get what you pay for," he says. Leonard would appear to be a good target for:
Prestige Pricing
What are examples of carrying costs?
Warehousing costs (rent, utilities, and salaries) Financial costs ( opportunity cost) Inventory costs (perishability, pilferage, shrinkage, and insurance)
Options & Decoy Pricing Lecture Example
Wine: store has two kinds of wine to buy. One is $10 and the other is $30. ($30 seems expensive) store has three kinds of wine to buy. One is $10, One is $30, and One is $50. ($50 seems expensive, and points your attention to the $30 bottle which compared to the "decoy" bottle @$50)
What is a markup?
a dollar amount added to the cost of products to get the selling price
Firm has a Stockturn rate = 1, with product that costs $100,000 to sell. _________________________ ________________ __________ f the inventory carrying cost is say 20% of inventory value, then the cost of carrying $100,000 in average inventory is $20,000.
a lot of $ tied up in inventory ALL the time they have the inventory
What is a Negotiated Price?
a price that is set based on bargaining between buyer and seller
Percentages are often the same within an industry, thus encouraging:
all players to increase efficiency and cut costs
What if someone other than the consumer pays the bill?
consumers are less price sensitive
What if the total expenditure is large?
consumers may be even MORE price sensitive
What if the end benefit is substantial?
consumers will be less price sensitive
What are Markups necessary for?
covering the costs of distribution and allows intermediaries to make a profit
What if it is easy to compare prices?
ease of comparison tends to increase price sensitivity
Break-even Analysis
evaluates whether the firm will be able to cover all its costs a particular price level
What is Marginal Analysis?
evaluating the change in total revenue and total cost from selling one more unit to find the most profitable price and quantity
Under variable costing, no indirect,
fixed cost is charged as inventory cost.
What does a low stockturn rate do to a firm?
increases inventory carrying costs and ties up working capital
What is Psychological pricing?
it attempts to discover the price range a customer prefers for a given pricing
What is Demand-backward pricing?
it involves setting an acceptable final consumer price and work backward to what a producer can charge
What is Price lining?
it sets a few price levels for a product line and then marks all items at these prices, so a few prices cover the field
What is Prestige pricing?
it sets a rather high price to indicate high quality or high status
What is Complementary product pricing?
means setting prices on several products as a group, to increase sales for the group as a whole
What is Bid pricing?
offering a specific price for each possible job rather than setting a price that applied for all customers
Average cost pricing is risky if demand is not ____________.
predictable
If the unit forecast does not match actual demand, average cost pricing might not
result in a profit
What is Price Lining?
setting a few price levels for a product line and then marking all items at these prices
What is Demand-Backward pricing?
setting an acceptable final consumer price and working backward to what a producer can charge
What is Product-bundle pricing?
setting one price for a set of products
What is Odd-Even Pricing?
setting prices that end in certain numbers
What is Value in use pricing?
setting prices that will capture some of what customers will save by substituting the firm's product for the one currently being used. Reference price: the price a consumer expects to pay
What is Bait Pricing?
setting some very low prices to attract customers but trying to sell more expensive models or brands once the customer is in the store
What is Leader pricing?
setting some very low prices--real bargains--to get customers into retail stores
What is Full-Line Pricing?
setting the prices for a whole line of products. May be market or firm-oriented.
Many intermediaries use a ____________ __________ ___________.
standard markup percentage
What is the fixed-cost contribution per unit?
the assumed selling price per unit MINUS the variable cost per unit
What if there are substitutes available?
the consumer is more price sensitive
What is market-oriented pricing?
the firm makes a line of products that are all aimed at the same general target market. The differences in price should reasonably reflect the differences in the features for each version of the product.
What is firm-oriented pricing?
the firm makes a line of products where each product serves an entirely different target market
What if the switching costs are great?
the greater the initial investment, the less price sensitive customers will be
The more inventory covered,
the higher the insurance premium paid.
What are stockturn rates?
the number of times average inventory is sold in a year
Variable costing is one of the two inventory costing systems --
the other being the total absorption costing
What is Markup percent?
the percentage of the selling price that is added to the cost to get the selling price
Break-even charts help find the break-even point (BEP):
the point where the total revenue from the quantity sold just equals the firm's total costs.
What is a Markup chain?
the sequence of markups firms use in channel pricing
What are Total Variable Costs?
the sum of expenses that change with the level of output (hourly wages, cost of materials, packaging, shipping, and sales commissions)
What is Total Fixed Cost?
the sum of those costs that are fixed in total, regardless of how much of something is produced (rent, managers' salaries, insurance)
What is Total Cost?
the sum of total fixed and total variable costs
If they can increase stockturn to 5 then they have only $20,000 tied up in inventory on average (100,000/5 or $20,000). If the inventory carrying cost is 20% of inventory value, ________ _________ ________ ___________ _________ a savings of $16,000.
then the cost of carrying $20,000 in average inventory is only $4,000 instead of $20000
What are sequential reductions?
they reduce the price over time if it does not sell to minimize inventory cost (including spoilage)
In marketing, carrying cost refers to the ___________ _________ _____ ___________ _____________.
total cost of holding inventory
What is Reference Pricing?
what you expect to pay given your experience with that product or what products like it usually cost
What is Subscription pricing?
where customers pay on a periodic basis for access to a product
Direct costs are costs that vary directly
with the inventory volume
