Deck 18: 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

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

Answer 2

False
Explanation: Stockturn rate is the number of times the average inventory is sold in a year.

Question 3

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

Answer 3

False
Explanation: Average-cost pricing does not make allowances for cost variations as output changes.So it's easy to lose money with average-cost pricing.

Question 4

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

Question 5

High markups always mean big profits.

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

Total fixed costs do not change when output increases.

Question 14

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.The item therefore has a retail selling price of $80.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

At zero output,total variable cost is zero.

Question 24

Average-cost pricing works well if the firm actually sells the quantity that 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 25

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

Question 26

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

Question 27

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 28

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 29

Average fixed cost goes down as output decreases.

Question 30

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

Question 31

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

Question 32

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

Question 33

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 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

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 42

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

Question 43

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

Question 44

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

Question 45

Leader prices are the "specials" on certain products that are advertised regularly to give an image of low prices.

Question 46

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

Question 47

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 48

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

Question 49

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

Question 50

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 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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 58

Each possible price has its own break-even point.

Question 59

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 60

The price that maximizes profit is the one that results in the greatest difference between total revenue and total cost.

Question 61

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 62

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

Question 63

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

Question 64

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

Question 65

The two basic approaches to price setting are

A)supply-oriented and demand-oriented.
B)cost-oriented and demand-oriented.
C)sales-oriented and profit-oriented.
D)cost-oriented and profit-oriented.
E)average-cost pricing and break-even analysis.

Question 66

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

Question 67

Most firms in the business world set their prices using

A)federal price guidelines.
B)demand-oriented price setting.
C)cost-oriented price setting.
D)supply and demand analysis.
E)marginal analysis.

Question 68

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

Question 69

Subscription pricing is popular because it gives sellers a regular and predictable stream of revenue.

Question 70

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

Question 71

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

Question 72

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

Question 73

With the expectation that some customers will pay later,firms sometimes use "free" as a price.

Question 74

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

Question 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

Which of the following is an example of a cost-oriented price setting approach?

A)negotiated prices
B)price sensitivity
C)value in use pricing
D)markup pricing
E)reference prices

Question 80

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

A)markup
B)rebate
C)list price
D)spiff
E)deal