Exam 18: Price Setting in the Business World

What is the first step in the markup chain?

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

High markups always mean big profits.

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

Use this information for questions that refer to the Sporting Products,Inc.(SPI)case. Randy Todd,marketing manager for Sporting Products,Inc.(SPI),is thinking about how changes taking place among retailers in his channel might impact his strategy. SPI sells the products it produces through wholesalers and retailers.For example,SPI sells basketballs to Wholesale Supply for $8.00.Wholesale Supply uses a 20 percent markup,and most of its "sport shop" retailer customers,like Robinson's Sporting Goods,use a 33 percent markup to arrive at the price they charge final consumers.However,one fast-growing retail chain,Sports Depot,uses only a 20 percent markup for basketballs,even though it pays Wholesale Supply the same price as other retailers.Furthermore,Sports Depot occasionally lowers the price of basketballs and sells them at cost,to draw customers into its stores and stimulate sales of its pricey basketball shoes. Sports Depot is also using other pricing approaches that are different from the sports shops that usually handle SPI products.For example,Sports Depot prices all its baseball gloves at $20,$40,or $60-with no prices in between.There are three big bins,one for each price point. Randy is also curious about how Sports Depot's new strategy to increase sales of tennis balls will work out.The basic idea is to sell tennis balls in large quantities to nonprofit groups,who resell the balls to raise money.For example,a service organization at a local college bought 2,000 tennis balls printed with the college logo.Sports Depot charged $.50 each for the tennis balls,plus a $500 one-time charge for the stamp to print the logo.The service group plans to resell the tennis balls for $2.50 each and contribute the profits to a shelter for the homeless. Randy is not certain if Sports Depot's ideas will affect SPI's plans.For example,SPI is considering adding tennis racquets to the lines it produces.This would require a $500,000 addition to its factory,as well as the purchase of new equipment that costs $1,000,000.The variable cost to produce a tennis racquet would be $20,but Todd thinks that SPI could sell the racquet at a wholesale price of $40 each.That would allow most retailers to add their normal markup and make a profit.However,Sports Depot may sells the racquet at a lower than normal price. SPI pays its salespeople a commission on each product they sell.The commission is

You are considering opening a fast-food store.Your fixed costs for the required land,building,parking lot paving,kitchen equipment,and neon sign will be $1,000,000.The variable cost will be $1.89 for servings,which will sell for $2.89.How many servings must you sell to break even?

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

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

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

Which of the following would NOT be included in a producer's total fixed cost?

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

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

Henry has classified the following items as variable costs.Which item has he NOT classified correctly?

Which of the following statements is true about break-even analysis?

Markup refers to a percentage of the

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

A company has total fixed costs of $120,000.Its variable cost per unit is $2.00 and its price per unit is $3.50.The break-even point in units is

Which of the following is an example of a fixed cost?

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

An automobile manufacturer charges a higher price for its hybrid car that runs on both electricity and gasoline than it charges for a car that runs on only gasoline.The manufacturer contends that the consumer will save money with the hybrid car in the long run because the money saved on gasoline will more than cover the price differential between the hybrid car and a regular car.This manufacturer is using