Exam 17: Price Setting in the Business World

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. What is the service organization's average cost for the printed tennis balls it buys from Sports Depot?

If the price per unit is $1.00 and the average variable cost per unit is 60 cents, the fixed cost contribution per unit is $1.40.

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:

Identify a weakness of the average-cost approach.

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

Demand-backward pricing is commonly used by producers of consumer products, especially shopping products such as women's clothing and appliances.

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

What is the best pricing tool marketers have for looking at costs and revenue at the same time?

Fly-Right Travel Agency arranges vacation packages to Disney World in Florida. The price includes airfare, a rental car, deluxe accommodations, and tickets to Disney World and other attractions. Fly-Right is using:

When customers have substitute ways of meeting a need, they are likely to be more price sensitive.

The price that maximizes profit is the one that results in the greatest difference between

All of the following observations concerning markups are true except

Regarding bid pricing:

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.

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. Randy Todd wants to use marginal analysis to price the new tennis racquets, but doesn't know the exact shape of the firm's demand curve. Under these circumstances marginal analysis:

Given the following data, compute the BEP in DOLLARS: Selling price = $2.00 Variable cost = $1.00 Fixed cost = $150,000

If a retailer adds a 25-cent markup to a product which costs the retailer $1.00, then according to the text the retailer's markup is 25 percent.

According to the text, markup (percent) means percentage of cost unless otherwise stated.

Average cost is obtained by dividing:

Leader pricing is normally used with products for which consumers do have a specific reference price.