Deck 16: Pricing and Credit Decisions

Question 1

The policy of pricing on the basis of what the traffic will bear will work only for nonstandardized products in markets in which little or no competition exists.

Answer 1

True

Question 2

The objective of the first phase of a break-even analysis is to determine the sales volume level at which the product, with an assumed price, will generate enough revenue to start earning a profit.

Answer 2

True

Question 3

Price lining refers to the systematic determination of the right price for a product or service.

Answer 3

False

Question 4

Markups may be expressed as a percentage of either the firm's cost or the industry-standard cost.

Question 5

In conducting a break-even analysis, it is important for the entrepreneur to realize that demand for a product always decreases as its price increases.

Question 6

A small business in competition with larger firms is seldom in a position to function as a price leader.

Question 7

Under certain circumstances, local, state, and federal laws must be considered in setting prices in a small business.

Question 8

Sound pricing practices begin with knowing product costs.

Question 9

In conducting a comprehensive break-even analysis, a firm must examine both its revenue-cost relationships and sales forecasts.

Question 10

Because the method takes into consideration both fixed and variable costs, average pricing is always an appropriate pricing approach for small businesses.

Question 11

When a small business markets a line of products, some of which may compete with one another, pricing decisions must take into account the effects of a single product price on the rest of the line.

Question 12

Because small businesses are small by definition, pricing and credit considerations are relatively unimportant to their overall performance.

Question 13

Break-even analysis is an accurate tool for pricing because it points directly to the correct price for a given product.

Question 14

Under certain conditions, pricing at less than total costs makes sense as a long-term strategy.

Question 15

A penetration price strategy is most practical when there exists little threat of short-term competition in the market or when startup costs must be recovered rapidly.

Question 16

Sellers using a practice called dynamic pricing set prices based on those of market leaders.

Question 17

Markup pricing is a cost-plus method of pricing that arrives at a markup percentage high enough to cover operating expenses, subsequent price reductions, and desired profit levels.

Question 18

With a skimming price strategy, prices for products or services are set lower than normal, long-range market prices in order to gain more rapid market acceptance or to increase market share.

Question 19

Prestige pricing (setting a high price to convey an image of high quality or uniqueness) is a pricing tactic that reflects competitive advantage.

Question 20

The competitive advantage of a firm will affect consumers' demand for its product.

Question 21

The aging schedule is a categorization of accounts receivable based on the length of time they have been outstanding.

Question 22

American Express and Diner's Club are examples of entertainment credit cards.

Question 23

Every applicant is credit worthy to some degree.

Question 24

The primary purposes of the Equal Credit Opportunity Act are to inform consumers about terms of a credit agreement and to require creditors to specify how finance charges are computed.

Question 25

Bank credit cards are widely accepted by retailers who desire to offer credit but do not have their own credit cards.

Question 26

Because it is a standard practice in many types of businesses, credit selling often cannot be avoided.

Question 27

The bad-debt ratio is the ratio of bad debts to total sales.

Question 28

Variable pricing strategy occurs where a business sets and advertises a fixed price but gives a discount for reasons such as the customer's knowledge and bargaining strength.

Question 29

Credit management should be implemented in a business when high levels of bad debt arise and should continue throughout the credit cycle until the level of bad debt is rectified.

Question 30

The total sales revenue of a small business is a direct reflection of

A) sales volume and credit terms.
B) price and credit terms.
C) price and expenses.
D) sales volume and price.

Question 31

The seller's measure of what he or she is willing to receive in exchange for transferring ownership or use of a product or service is known as

A) credit.
B) average pricing.
C) demand.
D) price.

Question 32

In many lines of business, trade credit terms are so firmly set by tradition that a unique policy is difficult for a small firm to implement.

Question 33

One of the benefits of extending credit to borrowers is that doing so provides better records of purchases on credit billing statements.

Question 34

Trade-credit agencies collect credit information on business firms and consumers in a given area.

Question 35

Sellers often decide to offer credit to borrowers because it helps with the exchange of purchased items.

Question 36

The Consumer Credit Protection Act requires that the finance charge for credit be stated as an annual percentage rate and that creditors specify the procedures used for correcting billing mistakes.

Question 37

An installment account is a typical trade credit agreement.

Question 38

By allowing credit sales a seller is following a risk-free practice to increase profits.

Question 39

An important source of credit information is the customer's previous credit history.

Question 40

Trade credit is extended by businesses to consumers purchasing large volumes of products.

Question 41

Fine Framings, a small framing shop, uses markup pricing to arrive at a final selling price. The firm sells its frames at a price of $10, given a $6 unit cost. Fine Framings' markup on the selling price is ____, and its markup on cost is ____.

A) 66.66%, 40%
B) 40%, 66.66%
C) 40%, 60%
D) 55%, 45%

Question 42

Gomez is pricing his products at a lower than normal, long-range market price in order to gain more rapid market acceptance. He is using a ____ strategy.

A) variable pricing
B) skimming price
C) penetration pricing
D) price lining

Question 43

The salesman told Todd that the high price of the dealerships' automobiles was indicative of their high quality. The dealership is using a ____ pricing strategy.

A) skimming
B) penetration
C) variable
D) prestige

Question 44

Active Feet, a small manufacturer of shoes, hired an additional vice-president and purchased a barrel of synthetic rubber used to make shoe soles. These two expenses should be considered a (an) ____ and a (an) ____, respectively.

A) selling cost/cost of goods sold
B) overhead cost/cost of goods sold
C) selling cost/overhead cost
D) overhead cost/selling cost

Question 45

Marie will account for the costs incurred by a her firm in producing its products (e.g., materials, machinery, etc.) as a part of its

A) general overhead expenses.
B) costs of manufacturing.
C) cost of goods sold.
D) manufacturing overhead expenses.

Question 46

In general, products that are consumed in fixed amounts have

A) inelastic demand.
B) constant demand.
C) variable demand.
D) elastic demand.

Question 47

Juan is using ____ when he systematically compares various cost and revenue estimates in order to determine the acceptability of alternative prices.

A) break-even analysis
B) price lining
C) cost functioning
D) demand functioning

Question 48

A competitor would likely use a ____ pricing strategy for a gaming console intended to compete directly with Sony's Playstation gaming console.

A) follow-the-leader
B) penetration
C) variable
D) prestige

Question 49

Hollywood Amusement, a small independent movie theater, decreased the price of admission from $5 to $4. Prior to the price decrease, the business sold 1,000 tickets each month. After the price decrease, it experienced ticket sales of 1,500 a month. If the change in sales is attributable only to the change in price, Hollywood Amusement faces ____ for its movie tickets.

A) inelastic demand
B) constant demand
C) variable demand
D) elastic demand

Question 50

Will's business will not be successful unless it charges a price for its products that covers its

A) total variable cost.
B) total cost.
C) total fixed cost.
D) total cost and some margin of profit.

Question 51

A pricing tactic whereby a firm sets a high price to convey an image of high quality or uniqueness is known as

A) skimming pricing.
B) penetration pricing.
C) variable pricing.
D) prestige pricing.

Question 52

A comprehensive break-even analysis entails

A) examining revenue-cost relationships and establishing sales forecasts.
B) analyzing marketing strategy.
C) the use of comparison pricing.
D) approximations of debits and credits.

Question 53

Nina should use ____ if she must cover operating expenses, subsequent price reductions, and achieve a desired profit level.

A) markup pricing
B) price lining
C) break-even pricing
D) cost-based pricing

Question 54

The Widget Company sells 1,000 widgets annually at a price of $35 each. If the company's pricing policies adhere to a 40% markup of selling price, the cost of each widget is

A) $14.
B) $21.
C) $28.
D) $32.

Question 55

In general, products that are consumed in different amounts have

A) inelastic demand.
B) constant demand.
C) variable demand.
D) elastic demand.

Question 56

Clock Tickers, a small retailer of a quality alarm clock, sells its product for $180. If Clock Tickers adheres to pricing based on a 35% markup of cost, the firm's product costs are approximately

A) $63.
B) $98.
C) $133.
D) $155.

Question 57

Within the framework of a break-even analysis, an examination of ____ is conducted to determine the quantity at which the product, with an assumed price, will generate enough revenue to start earning a profit.

A) costs
B) revenues
C) sales forecasts
D) costs and revenue

Question 58

Costs incurred by a firm in actually producing a product (e.g., materials, machinery, etc.) are considered to be a part of

A) general overhead expenses.
B) costs of manufacturing.
C) cost of goods sold.
D) manufacturing overhead expenses.

Question 59

Markup pricing may be expressed in terms of a percentage of either the ____ or the cost.

A) quantity
B) operating expenses
C) selling price
D) estimated expenses

Question 60

All of the following are reasons for implementing a penetration pricing strategy except

A) to gain rapid market acceptance.
B) to discourage new competitors' entry into the market.
C) to rapidly recover startup costs.
D) to increase existing market share.

Question 61

The basic types of credit cards include all of the following except

A) entertainment credit cards.
B) retailer credit cards.
C) bank credit cards.
D) collective establishment credit cards.

Question 62

Hollywood Entertainment analyzed its customer base to ascertain the characteristics of customer segments and understand special market conditions. The independent movie theater found that senior citizens thought the current $5 admission price was too high and that most consumers preferred to go to the movies after 6:00 p.m. To strengthen ticket demand, Hollywood Entertainment began offering $3.50 tickets to all seniors and $4 tickets for all movies starting before 6:00 p.m. Hollywood Entertainment was employing a

A) variable pricing strategy.
B) flexible pricing strategy.
C) price lining strategy.
D) differentiated pricing strategy.

Question 63

Which of the following is true with respect to revolving charge accounts?

A) A down payment is normally required.
B) Charged purchases may not exceed the credit limit.
C) A fixed amount must be paid monthly, regardless of the outstanding balance.
D) Finance charges increase as the outstanding balance increases.

Question 64

Hillary wants to purchase refrigerator on credit. If she uses an installment plan, which of the following is most likely to occur?

A) She will be required to make a down payment.
B) She will not be charged taxes.
C) By law, finance charges on her account cannot exceed 20 percent of the purchase price.
D) She will not get a discounted price on her purchase.

Question 65

Credit cards are usually based on ____ account system.

A) an open charge
B) an installment
C) a revolving
D) a selective

Question 66

Colorful Concoctions, a maker of children's crayons, decided to price its boxes of crayons below the long-term market price. The firm agreed to reduce its profit margin from 30 percent to 5 percent in the short-term in order to increase market share and discourage other firms from entering the crayon market. Colorful Concoctions was implementing a

A) variable pricing strategy.
B) skimming price strategy.
C) penetration pricing strategy.
D) price lining strategy.

Question 67

Within the context of a price lining strategy, the inventory level of the different lines depends directly on the ____ of the store's customers.

A) product awareness
B) personal demographics
C) credit worthiness
D) income level and buying desires

Question 68

Benefits of credit to sellers include all of the following except

A) creating a closer association with the customers.
B) smoothing out sales peaks and valleys.
C) providing a tool for competitive advantage.
D) sustaining long-term sales, even if these exceed the buying power of the customer.

Question 69

A trade credit bill of $80,000 with terms of sale of 2/5, net 30 means the buyer saves ____ if the bill is paid within the discount period.

A) $400
B) $1,600
C) $2,500
D) $4,000

Question 70

Setting prices for products or services using a particular competitor as a model of reference is known as a

A) variable pricing strategy.
B) flexible pricing strategy.
C) follow-the-leader pricing strategy.
D) price lining strategy.

Question 71

Which one of the following is not true with respect to pricing in a small business?

A) Continual price adjustments can be both costly to the seller and confusing to buyers.
B) In some situations, local, state, and federal laws must be considered when setting prices.
C) Conducted properly, price determination is an exact science.
D) Systems of discounts are often used to adjust prices to meet a variety of market needs.

Question 72

How much discount will a buyer receive if the buyer pays a trade credit bill of $60,000 with terms of sale of 2/5, net 30 on the net due date?

A) $0
B) $500
C) $1200
D) $3,000

Question 73

Quality Cars, an independent used-car dealership, utilizes long-term consumer credit in its business. Typically, consumers are allowed to place a 15 percent down payment on an automobile. Then, over a period of 48 months, the consumer is allowed to make payments on the balance of the account, which includes compound interest of 2 percent monthly on the unpaid portion. Quality Cars is employing ____ in its business.

A) open charge accounts
B) installment accounts
C) revolving accounts
D) selective accounts

Question 74

Credit granted by retailers to final consumers who purchase for personal or family use is referred to as

A) trade credit.
B) personal credit.
C) open credit.
D) consumer credit.

Question 75

Credit sales ____ the amount of working capital needed by the business doing the selling.

A) augment
B) decrease
C) increase
D) offset

Question 76

With ____, the customer obtains possession of goods or services when they are purchased, with payment due when billed at a later date.

A) an open charge account
B) an installment account
C) a revolving account
D) a selective account

Question 77

The major objective of a firm in granting credit is

A) generating consumer goodwill.
B) reducing bad debt risk.
C) make sales.
D) promoting the business.

Question 78

Which of the following is true with respect to installment accounts?

A) A down payment is normally required.
B) Large purchases are usually not covered by this form of credit.
C) By law, finance charges cannot exceed 20 percent of the purchase price.
D) Short-term consumer credit is provided.

Question 79

Handyman Hardware, a small community-based store, offers its consumers the option of using credit. Creditworthy individuals are able to use the "HH Credit Card" for all purchases up to a credit limit of $1,000. Consumers are required to pay at least 20 percent of their outstanding balance at the end of each month. A two percent finance charge is assessed on the unpaid balance at the end of each billing cycle. Handyman Hardware is employing ____ in its business.

A) open charge accounts
B) installment accounts
C) revolving charge accounts
D) selective accounts

Question 80

Natural Well, a local supplier of natural bottled water, initially sold its product at a premium price of $4 because the company believed consumers would view the bottled water as a prestige item. The company decided that when startup costs had been fully recovered and competition became imminent, the company would reduce the price to a more reasonable $1. Natural Well is implementing a

A) variable pricing strategy.
B) skimming price strategy.
C) penetration pricing strategy.
D) price lining strategy.