Exam 18: Price Setting in the Business World

With bid pricing, it is best for the bidder to use the same overhead and profit rates on all jobs since that will make it easy to estimate costs and eventually will increase profits.

Target return pricing is a variation of average-cost pricing--and has the same basic weakness as other average-cost methods.

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:

A firm in monopolistic competition with a down-sloping demand curve:

Changes in total cost depend on variations in total variable cost, since total fixed cost stays the same.

The price per unit is $1.00. The average variable cost per unit is 60 cents. The total fixed cost is $20,000. Compute the break-even point.

An equipment producer is introducing a new type of paint sprayer to sell to automobile body-repair shops. The sprayer saves labor time, gives as good a job with less expensive paint, and requires less work polishing. The seller should probably use:

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

At break-even point (BEP),

A low stockturn rate

Sellers sometimes take the auction approach and adapt it by using sequential price reductions over time. When or where is this approach most commonly used?

When consumers decide to purchase a music CD from Amazon.com, the company's Web site 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:

By definition, a markup of $1 on a cost of $2 translates to a markup of 40 percent.

It makes sense for a manager to use leader pricing on a product only if consumers are unlikely to be aware of the normal price.

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, 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. -How many of the printed tennis balls must the service organization sell to cover the $500 fixed printing charge?

With respect to markups and turnover, a marketing manager should be aware that:

At zero output, total variable cost is zero.

A firm with a stockturn rate of 5 sells products that cost it $100,000. Its annual inventory carrying cost is about 20 percent of the inventory value. What is its annual inventory carrying cost?

The price most consumers expect to pay for a product is called the leader price.

A marketing manager has just estimated that her firm's marginal revenue will become negative if a proposed price cut is made. This means that: