Exam 17: Price Setting in the Business World

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?

Total variable cost:

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

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

Use this information for question 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, only uses 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 of its baseball gloves at $20, $40, or $60-with no prices in between. There are three big bins - one for each price point. Todd 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. Todd is not certain if Sports Depot 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, if Sports Depot sells the racquet at a lower than normal price other retailers might decide to carry it. When Sports Depot temporarily lowers the price of basketballs, it is using:

Best Buy sets its prices below other electronics stores in its service area and generally attracts more customers than the others. Best Buy apparently hopes to earn a profit by

Marginal analysis

Average-cost pricing works well if the firm actually sells the quantity which 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.

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

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

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

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

High markups always mean big profits.

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:

When CenturyLink attracts residential customers by setting one monthly fee for high-speed Internet, cable TV, and long-distance phone services that is $40 less than the price of purchasing these three services separately, this is an example of:

Which of the following pricing approaches specifically considers the concept of elasticity of demand?

The BEP, in units, can be found by dividing

The big problem with average-cost pricing is that:

A firm using sequential price reductions starts with a high price but plans to reduce that price step-by-step until its product is sold out.

Break-even analysis can be useful for: