Exam 18: Price Setting in the Business World

Walgreens Drugstores advertises that its Tylenol prices are "the lowest in town" in order to stimulate sales of other products along with Tylenol.This is an example of

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. Randy Todd could use break-even analysis with his tennis racquet decision to

Average fixed cost goes down as output decreases.

Customers are likely to be more price sensitive when

The sum of those costs that do not change in total-no matter how much is produced-is called the

Average-cost pricing

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

Which of the following statements correctly reflects the relationships among quantity,cost,and price,based on the cost-oriented pricing model?

Gabriella Sax believes that customers in her dress shop find certain prices very appealing.Between these price levels,all prices are seen as roughly the same and price cuts in these ranges generally do not increase the quantity sold (i.e.,the demand curve tends to drop vertically within these price ranges).With this in mind,Gabriella prices her items as close as possible to the top of each such price range.This is

Consumers are more likely to be price sensitive when

When consumers decide to purchase a music CD from Amazon.com,the company's website often suggests that consumers purchase an additional CD by the same artist for a combined price that is lower than the two CDs would sell for separately.Amazon.com is using

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

All of the following observations concerning markups are true EXCEPT that

Given the following data,what is the BEP-in dollars? Selling price = $2.00 Variable cost = $1.00 Fixed cost = $150,000

Marci,a student,is used to paying $1.25 for a 12-ounce can of Diet Coke from various vending machines on campus,so she expects the new vending machine just installed outside her Chemistry classroom to charge her the same amount for her favorite beverage.For Marci,the $1.25 price is a

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

Setting prices by adding a "reasonable" markup to a firm's average cost is called

Given the following data,what is the BEP in units? Selling price = $2.00 Variable cost = $0.75 Fixed cost = $250,000

Which of the following statements about markups is true?

Blue Ridge Weavers wants to set its selling price on an item so that the retail list price will be $50-taking into account the usual markups of 10 percent at wholesale and 30 percent at retail.At what price should Blue Ridge Weavers sell the item?