Question 1

Which of the following statements is not True of markdowns?

Accepted Answer

A buyer's objective isn't to minimize markdown, but rather to manage the markdowns. If markdowns are too low, the buyer is probably pricing the merchandise too low, not purchasing enough merchandise, or not taking enough risks with the merchandise being purchased.

Question 2

Which of the following statements does not describe a benefit of markdowns for a retailer?

Accepted Answer

Markdowns result in a low gross margin. Markdown money refers to funds a vendor gives the retailer to cover lost gross margin dollars that result from markdowns and other merchandising issues.

Question 3

________ is an analytical tool that enables retailers to know the number of units they need to sell to begin making a profit.

Accepted Answer

Break-even analysis determines, on the basis of fixed and variable costs, how much merchandise needs to be sold to achieve a break-even (zero) profit. The break-even point quantity is the quantity at which total revenue equals total cost, and then profit occurs for additional sales.

Question 4

Jenny runs a produce stand in an inner-city neighborhood. With the recent layoffs, she has become popular because she gives her day-old produce to the local charity. Which of the following benefits does Jenny gain by donating produce to the local charity?

Accepted Answer

Charitable giving is always a good corporate practice. It is a way of giving back to the community and has strong public relations benefits.

Question 5

The merchandise cost from the vendor for an MP3 player is $82.50, and the retailer who is selling the device wants to use an initial markup percentage of 67 percent. Calculate the initial retail price.

Accepted Answer

Retail price = Cost/(1 - Markup percentage) = $82.50/.33 = $250

Question 6

How does optimization software help retailers in taking markdowns?

Accepted Answer

Optimization software works by continually updating its pricing forecasts on the basis of actual sales throughout the season and factoring in differences in price sensitivities. Each week, as new sales data become available, it readjusts the forecasts to include the latest information.

Question 7

Because of markdowns, discounts to employees and customers, and merchandise reductions,

Accepted Answer

Retailers rarely sell all items at the initial price. They frequently reduce the price of items for special promotions or to get rid of excess inventory at the end of a season. In addition, discounts are given to employees, and some merchandise is lost to theft and accounting errors (inventory shrinkage). These factors that reduce the actual selling price from the initial sales price are called reductions. Thus, there is a difference between the initial markup and the maintained markup.

Question 8

Some retailers liquidate end-of-season merchandise to retailers like TJ Maxx, who in return sell it at a deep discount. What is the benefit to the retailer who liquidates merchandise using this strategy?

Accepted Answer

This approach for liquidating unsold merchandise only enables retailers to recoup a small percentage of the merchandise's cost-often a mere 10 percent.

Question 9

Which of the following statements is a limitation of the rule-based approach to taking markdowns?

Accepted Answer

The rule-based approach does not consider the demand for the merchandise at different price points or in different locations and thus produces less-than-optimal profits.

Question 10

When making a good markdown decision, a retailer should

Accepted Answer

Vendors have a partnering relationship with their retailers and thus a vested interest in their success. Vendors that are knowledgeable about the market and competition can help with stock selections.

Question 11

Ferdinand runs a pie shop in a busy metropolis. He sells his fresh pies for $7, but it costs him $2.50 to make them. The cooking equipment in his shop cost him $46,000. How many pies does Ferdinand need to sell to make $50,000 annually?

Accepted Answer

Break-even quantity = Fixed cost/(Actual unit sales price - Unit variable cost) = ($46,000 + $50,000)/($7 - $2.5) = 21,333 pies. The break-even point quantity is the quantity at which total revenue equals total cost, and then profit occurs for additional sales.

Question 12

Which of the following is not a viable strategy for liquidating markdown merchandise?

Accepted Answer

There are many strategies to liquidate unsold merchandise, including consolidating to a single location, selling the merchandise to an off-price retailer, donating the merchandise to charity, returning it to the vendor, selling at Internet auctions, or carrying merchandise over to the next season.

Question 13

Which of the following statements on markdowns is False?

Accepted Answer

Markdowns are part of the cost of doing business, and thus buyers plan for them. They tend to order more fashion merchandise than they forecast actually selling because they are more concerned about underordering and stocking out of a popular item before the end of the season than about overordering and having to discount excess merchandise at the end of the season.

Question 14

Which of the following statements describes a situation in which markdowns would not be appropriate?

Accepted Answer

Markdowns are applicable for slow-selling merchandise that decreases inventory turnover.

Question 15

Which of the following is an example of a fixed cost for a bridal gown shop?

Accepted Answer

A fixed cost is the cost that does not change with the quantity of product purchased or sold. The mannequin was purchased and requires no further expense no matter how many gowns it models.

Question 16

The retail price of a sweater is $75, and the initial markup is 51 percent. Calculate the cost of the product.

Accepted Answer

Cost of merchandise = Retail price * (1 - initial markup percentage) = $75 * .49 = $36.75.

Question 17

Which of the following is an example of a variable cost for a retailer of electronic equipment?

Accepted Answer

The variable cost is the retailer's expenses that vary directly with the quantity of product produced and sold. Variable costs often include direct labor and materials used in producing the product.

Question 18

Which of the following is the least profitable method of liquidating markdown merchandise?

Accepted Answer

It is not profitable to carry over merchandise because of excessive inventory carrying costs and the potential of having the merchandise look "shopworn" or outdated.

Question 19

Eunice buys a worm farm. She plans to sell a small carton of worms to people who want to fish for $3. Her fixed costs are $1,201, and her variable cost for each carton sold is $.75. How many cartons of worms does Eunice need to sell to reach her break-even quantity?

Accepted Answer

Break-even quantity = Total fixed costs/(actual unit sales price - unit variable cost) = 1201/(3 - .75) = 1201/2.25 = 533.78 = 534 cartons. The break-even point quantity is the quantity at which total revenue equals total cost, and then profit occurs for additional sales.

Question 20

Reductions in the initial retail prices are known as

Accepted Answer

Markdowns are the reductions in the initial retail prices. Retailers' reasons for taking markdowns can be classified as either clearance (to dispose of merchandise) or promotional (to generate sales).

Quiz 13: Retail Pricing