Deck 17: Price Setting in the Business World

Question 1

Average-cost pricing means adding a reasonable markup to the total cost of a product.

Answer 1

False
Explanation: Average-cost pricing means adding a reasonable markup to the average cost of a product.

Question 2

Retailers who earn high profits generally use higher markups than retailers who have low profits.

Answer 2

False
Explanation: Some retailers try to speed turnover to increase profit even if this means reducing their markups. If they can sell a much greater amount in the same time period, they may be able to take a lower markup and still earn higher profits at the end of the period.

Question 3

If a retailer adds a 25-cent markup to a product which costs the retailer $1.00, then according to the text the retailer's markup is 25 percent.

Answer 3

False
Explanation: Unless otherwise stated, markup (percent) means percentage of selling price that is added to the cost to get the selling price.

Question 4

High markups always mean big profits.

Question 5

A certain item has a production cost of $24. The manufacturer takes a 25 percent markup, the wholesaler takes a 20 percent markup, and the retailer takes a 50 percent markup. Therefore, the item has a retail selling price of $80.

Question 6

If a retailer adds a 25-cent markup to a product which costs the retailer $1.00, then according to the text the retailer's markup is 20 percent.

Question 7

A markup is the dollar amount added to the cost of products to get the selling price.

Question 8

Average-cost pricing guarantees that the firm will earn enough to at least cover its costs.

Question 9

A major problem with average-cost pricing is that it does not allow for cost variations at different levels of output.

Question 10

According to the text, markup (percent) means percentage of cost unless otherwise stated.

Question 11

Average-cost pricing consists of adding a 20 percent markup to the average cost of an item.

Question 12

Items with lower markups may be more profitable-if the stockturn is higher.

Question 13

The stockturn rate is the number of times the average inventory must turnover to make a profit in a given year.

Question 14

A low stockturn decreases inventory carrying cost and frees up working capital.

Question 15

A "markup chain" can be used to calculate the price structure in a whole channel.

Question 16

By definition, a markup of $1 on a cost of $2 translates to a markup of 40 percent.

Question 17

A supermarket is bound to expect a higher stockturn for fresh fruits and vegetables compared to soaps and detergents.

Question 18

Cost-oriented approaches are the most common price setting approach.

Question 19

Most retailers and wholesalers set prices by using a different markup percent for each different product carried.

Question 20

Firms with high markups and low turnover rates may earn lower profits than firms with low markups and high turnover rates.

Question 21

Average-cost pricing works best in situations where demand conditions do not change a lot.

Question 22

Ignoring demand is the major weakness of average-cost pricing.

Question 23

When setting prices, the marketing manager should consider the firm's demand curve, or else the price may not even cover the firm's total cost.

Question 24

A firm's average fixed cost increases as its output increases.

Question 25

Even if a firm's average variable cost remains constant per unit, its average cost will increase as output increases.

Question 26

Average fixed costs are lower when a large quantity is produced.

Question 27

Average fixed cost goes down as output decreases.

Question 28

If a firm's average variable cost is constant per unit, then the firm's average cost decreases continually as output increases because average fixed cost decreases continually.

Question 29

As output increases, a firm's average fixed cost probably will go down.

Question 30

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

Question 31

A major advantage of average-cost pricing is that it assumes costs remain constant at different levels of output.

Question 32

Average-cost pricing works well if the firm actually sells the quantity which was used in setting the price, but losses may result if actual sales are much higher than were expected-due to higher total variable costs.

Question 33

A firm's total cost increases only when its variable cost increases.

Question 34

Cost-oriented selling price per unit is obtained by adding a firm's desired profit per unit to the average total cost.

Question 35

At zero output, total variable cost is zero.

Question 36

An advantage of average-cost pricing is that it considers competitors' costs and prices.

Question 37

Break-even analysis evaluates whether the firm will be able to cover all its costs with a particular price.

Question 38

If a manager sells more than was expected when average-cost pricing was used to set a price, the firm will lose money.

Question 39

Total fixed costs do not change when output increases.

Question 40

A firm's average variable cost (per unit) is obtained by dividing the total fixed cost by the total variable cost.

Question 41

Business customers are sometimes less price sensitive if there are switching costs.

Question 42

Break-even analysis is particularly accurate because it recognizes that the demand curve is downward sloping.

Question 43

If the price per unit is $1.00 and the average variable cost per unit is 60 cents, the fixed cost contribution per unit is $1.40.

Question 44

Switching costs refer to costs that a customer faces when buying a product that is different from what has been purchased or used in the past.

Question 45

The break-even point is the intersection of the total cost curve and the total profit curve.

Question 46

There is only one price that will be profitable for firms with down-sloping demand curves.

Question 47

Sequential price reductions and clearance sales are the same thing.

Question 48

When customers have to pay the bill themselves, they are likely to be more price sensitive.

Question 49

When the end benefit of a purchase is significant to the customer, he is likely to be less price sensitive.

Question 50

All customers have the same reference price for the same basic type of purchase.

Question 51

Each possible price has its own break-even point.

Question 52

The price most consumers expect to pay for a product is called the leader price.

Question 53

Even if a manager's estimate of a demand curve is not exact, there is usually a profitable range around the price that would maximize profit.

Question 54

A firm using sequential price reductions starts with a high price but plans to reduce that price step-by-step until its product is sold out.

Question 55

Online auctions (on the Internet) are becoming very popular as a way to determine how much customers are willing to pay for a product.

Question 56

Value in use pricing considers what a customer will save by buying a product.

Question 57

Auctions have not proved very effective in determining how much potential customers will (or will not) pay for a product.

Question 58

The greater the total expenditure, the less price sensitive customers are.

Question 59

Marginal analysis focuses on the changes in average fixed cost per unit and average variable cost from selling one more unit to find the most profitable price and quantity.

Question 60

If a company raises its price per unit, but keeps total fixed cost and variable cost per unit the same, the break-even point will be lower.

Question 61

The major disadvantage of price lining is that it is complicated for both clerks and customers.

Question 62

The Federal Trade Commission encourages bait pricing because it reduces the prices that consumers pay for products.

Question 63

A major difference between leader pricing and bait pricing is that bait pricing is criticized as unethical while leader pricing is not.

Question 64

Leader pricing is normally used with products for which consumers do have a specific reference price.

Question 65

If Radio Shack offers several models of clock radios at each $5 increment between $19.95 and $49.95, it is probably practicing odd-even pricing.

Question 66

Bid pricing is offering a specific price for each possible job, rather than setting a price that applies to all potential customers.

Question 67

"Full-line pricing" is setting prices for a whole line of products.

Question 68

Prestige pricing involves setting a rather high price because the product has a normal down-sloping demand curve.

Question 69

The sole objective of leader pricing is to sell large quantities of the leader items.

Question 70

Leader pricing is typically used with well-known, widely used items which are not stocked heavily by consumers.

Question 71

Price lining tends to result in faster turnover, fewer markdowns, quicker sales, and simplified buying.

Question 72

Demand-backward pricing is commonly used by producers of consumer products, especially shopping products such as women's clothing and appliances.

Question 73

It makes sense for a manager to use leader pricing on a product only if consumers are unlikely to be aware of the normal price.

Question 74

Product-bundle pricing may encourage customers to spend more and buy products that they would not buy otherwise.

Question 75

Demand estimates are required for demand-backward pricing to be successful.

Question 76

With bid pricing, it is best for the bidder to use the same overhead and profit rates on all jobs since that will make it easy to estimate costs and eventually will increase profits.

Question 77

Prestige pricing is most common for luxury products such as furs, jewelry, and perfume.

Question 78

With complementary product pricing, different price levels are set on different products because the products are targeted at different market segments.

Question 79

"Demand-backward pricing" involves a producer estimating an acceptable final consumer price and working backward to determine what the producer can charge in the channel.

Question 80

"Psychological pricing" involves setting prices which end in certain numbers, while "odd-even pricing" is setting prices which have special appeal to target customers.