Exam 18: Price Setting in the Business World

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.

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. By pricing below other retailers,Sports Depot apparently

What is the main advantage of price lining?

Two hundred units of a good were produced at a total cost of $4,000.Given a total fixed cost equal to $1,800,the average total cost per unit will be equal to

A producer makes an item for $32 and sells it with a 50 percent markup to a wholesaler.The wholesaler then applies a 20 percent markup.A retailer then uses a 60 percent markup.The final retail selling price is

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

If a profit-oriented marketing manager doesn't know the exact shape of the firm's demand curve,marginal analysis

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

Setting relatively high prices to suggest high quality or high status is called

When Best Buy advertises one price for the cost of a computer and a monitor,it is using

Which of the following prices is most likely to be seen if a firm is using odd-even pricing?

The basic problem with the average-cost approach is that it

In a typical break-even analysis,a firm's fixed-cost contribution per unit

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

The BEP,in units,can be found by dividing

The sum of those changing expenses that are closely related to output is called the

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

A producer sells an item to a wholesaler for $4.00,and the wholesaler uses a markup of 25 percent on its selling price.What will be the cost to the retailer?

In marginal analysis,the most profitable price is the price at which

The main advantage that marginal analysis has over most other popular pricing methods is that it