Chapter 18: Price Setting in the Business World

The total cost of producing 200 units of a product is $4,000, including a total fixed cost of $1,800. This means that the average variable cost per unit is A. $20. B. $9. C. $11. D. $29. E. $36.

C. $11 - Total cost is the sum of total fixed and total variable costs. In this case, the total variable cost can be determined by subtracting the total fixed cost from the total cost: $4,000 - $1,800 = $2,200. The average variable cost per unit is the total variable cost divided by the number of units: $2,200 / 200 = $11.

Randy's Convenience Mart buys Lemon Fizz, a cold beverage, in 2-liter plastic bottles for $1.00. They use a 50 percent selling price markup, meaning that consumers pay Randy's ________ per bottle. A. $3.00 B. $1.50 C. $2.00 D. $0.50 E. $1.25

C. $2.00 - Consumers pay Randy's $2 for a bottle of Lemon Fizz. This is because a selling price markup percentage expresses what percent of the final price is attributable to the markup. In order for 50 percent of the final price for a bottle of Lemon Fizz to come from the markup, the final price must be twice the cost that Randy's paid for the bottle. To put it another way, if Randy's charge consumers $2 for a bottle of Lemon Fizz, then $1 of that (50 percent) is equal to the cost of the bottle and $1 (the other 50 percent) is the markup Randy's gave to the bottle.

Which of the following is true of the various demand-oriented approaches for setting prices? A. Psychological pricing involves setting prices that end in certain numbers. B. Price lining is a highly complex pricing strategy for both salespeople and customers. C. Demand-backward pricing starts with a price consumers are willing to pay and then figures out what a producer can charge. D. Bait pricing is the process of setting high prices to lure those customers who are interested in buying expensive models or brands. E. Prestige pricing is the process of setting low prices to attract more target customers.

C. Demand-backward pricing starts with a price consumers are willing to pay and then figures out what a producer can charge.

reference price

the price a consumer expects to pay

total fixed cost

the sum of those costs that are fixed in total - no matter how much is produced - rent, salaries, property taxes, insurance

total cost

the sum of total fixed and total variable costs - depends on variations in total variable cost

average fixed cost (per unit)

the total fixed cost divided by the related quantity (TFC/Q)

average variable cost (per unit)

the total variable cost divided by the related quantity (TVC/Q)

A primary reason that a firm would use average-cost pricing is that it A. does the best job of accounting for demand. B. accounts for variations in costs effectively. C. is the most accurate method overall. D. is unlikely to result in losses if there is a mistake. E. is easy to do.

E. is easy to do. - Average-cost pricing is relatively simple and easy to do. However, it does not account for demand or variations in costs in an effective manner, and it can lead to big losses if things do not work out as originally estimated.

Which of the following statements is true about how firms use markups to set prices? A. There is no such thing as a standard markup. B. A markup is usually expressed as a percentage, rather than a dollar amount. C. A markup is always based on cost, and never on the selling price. D. A high markup will lead to high profits. E. A unique markup needs to be set for each product a firm is selling.

B. A markup is usually expressed as a percentage, rather than a dollar amount. - Markups are usually stated as percentages, rather than dollar amounts. The percentage is most often based on the selling price, but markups based on cost are also possible. Many firms use the same percentage markup for everything they sell. A high markup does not guarantee high profits. Different companies in the same line of business often use the same markup percent.

Which of the following describes subscription pricing? A. All of the earrings in the accessory shop cost either $15, $20, $25, or $30. B. For $10.99 a month, customers can stream any movie in Netflix's catalog. C. The grocery store advertises special low prices on cereal to get customers into the store. D. The price of the luxury car is purposely set high so as to suggest high quality and high status. E. A customer can get a cheeseburger, french fries, and a soda for $1.50 cheaper than buying each of them individually.

B. For $10.99 a month, customers can stream any movie in Netflix's catalog.

When a product moves through several levels within a channel between being produced and its final sale at retail to a consumer, the price that the consumer pays is likely the result of a(n) A. standard markup. B. markup chain. C. stockturn rate. D. auction. E. break-even analysis.

B. markup chain. - When a product moves through several levels in a channel before reaching the consumer, each member of the channel is likely to apply a different markup. Therefore, the final price that the consumer pays is the result of a markup chain, where the markup from one level becomes part of the base price at the next level to which an additional markup is added.

it is cheaper for a cable company's customers to sign up for a package that includes cable, Internet, and phone service than for them to purchase each of these services individually. This is an example of A. full-line pricing. B. product-bundle pricing. C. leader pricing. D. psychological pricing. E. complementary product pricining.

B. product-bundle pricing.

The price that a consumer expects to pay for a product is known as its A. bait price. B. reference price. C. bid price. D. negotiated price. E. break-even price.

B. reference price.

Trying to find the most profitable price and quantity to produce A. requires average-cost pricing. B. requires an estimate of the firm's demand curve. C. is easy once the average fixed cost is known. D. is only sensible if demand estimates are exact. E. All of these alternatives are correct.

B. requires an estimate of the firm's demand curve. - A demand curve looks at how price will affect demand for a product. For instance, demand for many products (but not all) decreases as price increases. In order to maximize profitability, a marketing manager needs to at least estimate how many units of his or her firm's product can be sold at various prices, and identify a price that strikes an appropriate balance between charging as much as possible and selling as many units as possible.

Customers tend to be more price-sensitive when A. there are switching costs. B. they have substitute ways of meeting a need. C. the significance of the end benefits of the purchase is great. D. it is difficult to compare prices. E. someone else pays the bill or shares the cost.

B. they have substitute ways of meeting a need.

Which of the following is true of marginal analysis? A. Marginal analysis considers only costs, not demand. B. Marginal analysis focuses on finding the least profitable price rather than getting an estimate of how profit might vary across a range of relevant prices. C. Marginal analysis focuses on the price that earns the highest profit, but a slight miss does not mean failure because demand estimates do not have to be completely accurate. D. Marginal analysis does not consider how costs, revenue, and profit change at different prices. E. Marginal analysis is a cost-oriented approach.

C. Marginal analysis focuses on the price that earns the highest profit, but a slight miss does not mean failure because demand estimates do not have to be completely accurate.

Some firms sell computer printers at a relatively low suggested retail price and sell the ink cartridges required to run the printers at a relatively high price. This form of pricing is called A. full-line pricing. B. psychological pricing. C. complementary product pricing. D. bid pricing. E. product-bundle pricing.

C. complementary product pricing.

The best pricing tool marketers have for looking at costs and revenue (demand) at the same time is A. bid pricing. B. break-even analysis. C. marginal analysis. D. markup pricing. E. average-cost pricing.

C. marginal analysis. - Marginal analysis focuses on the changes in total revenue and total cost from selling one more unit to find the most profitable price and quantity.

Loraine is a marketing manager responsible for a line of five different dishwasher models. The line includes a basic dishwasher, several models with progressively more and better features, and a high-end model with a fashionable appearance and several unique features. Loraine should use ________ pricing when setting the prices for these refrigerators. A. product-bundle B. firm-oriented full-line C. market-oriented full-line D. demand-backward E. complementary product

C. market-oriented full-line

Which of the following is a demand-oriented approach to pricing? A. markup pricing B. break-even analysis C. prestige pricing D. average-cost pricing E. fixed-cost pricing

C. prestige pricing

An equipment producer produces a new type of paint sprayer for automobile body-repair shops. The sprayer not only saves labor time on the actual painting, but also reduces the need for polishing after the painting is done. The producer considers the money that auto-body repair shops will save on labor and polishing if they buy its new sprayer and sets a price for it that makes it cheaper for them to buy and use the new sprayer than to continue with their existing equipment. Which of the following price setting approaches is the producer using in this scenario? A. odd-even pricing B. leader pricing C. bid pricing D. value in use pricing E. negotiated pricing

D. value in use pricing

Pulaski Plumbing Supply is planning to bring a new type of valve to market and is conducting a break-even analysis. For this analysis they are assuming a selling price of $2.50 per valve. The total fixed cost associated with producing the valve is $10,000. The variable cost to produce each valve is $2.10. In this analysis, what is the break-even point (BEP) for the valve? A. 4,000 units B. 4,762 units C. 50,000 units D. 2,174 units E. 25,000 units

E. 25,000 units - The BEP in this analysis is 25,000 units. This is calculated by first determining the fixed cost contribution per unit by subtracting the variable cost per unit from the selling price for a valve: $2.50 - $2.10 = $0.40. Then the total fixed cost is divided by the fixed cost contribution per unit to determine the BEP: $10,000 / $0.40 = 25,000 units.

price lining

setting a few price levels for a product line and then marking all items at these prices

prestige pricing

setting a rather high price to suggest high quality or high status

demand-backward pricing

setting an acceptable final consumer price and working backward to what a producer can charge

odd-even pricing

setting prices that end in certain numbers / setting prices a few dollars or cents under an even number

psychological pricing

setting prices that have special appeal to target customers

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

leader pricing

setting some very low prices - real bargains - to get customers into retail stores

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

markup (percent)

the percentage of selling price that is added to the cost to get the selling price - markups are related to selling price of convenience Markup Percent = margin/selling price

break-even analysis (BEP)

the sales quantity where the firm's total cost will just equal its total revenue BEP (in units) = total fixed cost/ fixed cost contribution per unit

fixed-cost (FC) contribution per unit

the selling price per unit minus the variable cost per unit (Selling price - variable cost)

total variable cost

the sum of those changing expenses that are closely related to output - expenses for parts, wages, packaging material, sales commissions - variable costs increase as output increases

Which of the following statements is true of average-cost pricing? A. The average cost approach considers cost variations at different levels of output. B. In a typical situation, the average cost per unit increases as the quantity produced increases. C. It is possible to compute average cost without a quantity estimate. D. Average-cost pricing always takes into consideration competitors' costs and prices. E. Average-cost pricing works well if the firm actually sells the quantity it used to calculate the average-cost price.

E. Average-cost pricing works well if the firm actually sells the quantity it used to calculate the average-cost price. - Average-cost pricing works well if the firm actually sells the quantity it used to set the average-cost price. Losses may result, however, if actual sales are much lower than expected. On the other hand, if sales are much higher than expected, then profits may be very good. But this will only happen by luck— because the firm's demand is much larger than expected.

The stockturn rate is the A. rate at which the stock value of an organization fluctuates over a year. B. quantity of a company's stock that is returned to an investor. C. time taken for a single batch of inventory to be sold. D. ratio between the number of items in stock to the number of items sold. E. number of times the average inventory is sold in a year.

E. number of times the average inventory is sold in a year.

Holly's Candle Shop sells scented candles. The shop offers hundreds of different types of candles, but they are all priced at either $10, $8, or $6. In this case, Holly's Candle Shop appears to be using A. odd-even pricing. B. penetration pricing. C. price negotiating. D. leader pricing. E. price lining.

E. price lining.

average-cost pricing

adding a reasonable markup to the average cost of a product

Which of the following explains why firms may incur losses with average-cost pricing? A. The average-cost approach does not consider how costs change as output changes. B. The average-cost pricing model requires high levels of expenditure on market demand forecasting. C. The total number of units that are manufactured is a poor indicator of a firm's average cost. D. In most cases, the average cost of two different products is never the same. E. The average-cost price is always set such that the number of products sold is higher than expected.

A. The average-cost approach does not consider how costs change as output changes.

Which of the following is an example of a cost-oriented price setting approach? A. break-even analysis B. negotiated pricing C. marginal analysis D. value in use pricing E. bid pricing

A. break-even analysis - Break-even analysis is a useful tool for analyzing costs and evaluating what might happen to profits in different market environments. It is a cost-oriented approach. Like other cost-oriented approaches, it does not consider the effect of price on the quantity that consumers will want—that is, the demand curve.

Average-cost pricing A. involves adding a "reasonable" markup to the average cost of a product. B. puts a great deal of emphasis on determining how sensitive consumer demand is at different price levels. C. relies on intuition to establish prices. D. considers cost variations at different levels of output. E. focuses on the differences between fixed and variable costs.

A. involves adding a "reasonable" markup to the average cost of a product. - A manager usually finds the average cost per unit by studying past records.

With respect to markups and turnovers, a marketing manager should be aware that A. markup combines with stockturn rate to determine what the product actually earns. B. a high stockturn rate ties up working capital. C. a low stockturn rate decreases inventory carrying costs. D. speeding up turnover often decreases profits because the firm's operating costs are a function of time and the volume of goods sold. E. high markups always mean big profits, even if sales are low.

A. markup combines with stockturn rate to determine what the product actually earns.

marginal analysis

evaluating the change in total revenue and total cost from selling one more unit to find the most profitable price and quantity - best pricing tool marketers have for looking at costs and revenue (demand) at the same time - shows how cost, revenue, and profit change at different prices - price that maximizes profit is the one that results in the greatest difference between total revenue and total cost - usually a range of profitable prices

average cost (per unit)

The total cost divided by the related quantity (TC/Q)

subscription pricing

customer pay on a periodic basis for access to a product

markup

a dollar amount added to the cost of products to get the selling price - to make a profit and cover operating expenses