Answers To Chapter 14 Questions

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Answers To Chapter 14 Questions

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2. What would be your response to the statement,
"Profit maximization is the only legitimate
pricing objective for the firm."
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2. What would be your response to the statement,
"Profit maximization is the only legitimate
pricing objective for the firm."

• Profit maximization is not the only legitimate
  pricing objective for a firm.  Often, a target
  return objective or a long-run profit objective
  is set by a firm.  Non-profit goals such as unit
  sales objectives, market share objectives, as
  well as objectives influenced by feelings of
  social responsibility are also legitimate pricing
  goals. Example - AIDS medications for Africa
  priced at cost.

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4. A marketing executive once said, "If the
price elasticity of demand for your product is
inelastic, then your price is probably too low."
What is this executive saying in terms of the
economic principles discussed in this chapter?
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4. A marketing executive once said, "If the
price elasticity of demand for your product is
inelastic, then your price is probably too low."
What is this executive saying in terms of the
economic principles discussed in this chapter?

• If the price elasticity of demand for a given
  product is inelastic, then a price increase will
  also increase total revenue.  Therefore, the
  executive is saying that a price increase will
  increase total revenue.

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4. A marketing executive once said, "If the
price elasticity of demand for your product is
inelastic, then your price is probably too low."
What is this executive saying in terms of the
economic principles discussed in this chapter?

• If the price elasticity of demand for a given
  product is inelastic, then a price increase will
  also increase total revenue.  Therefore, the
  executive is saying that a price increase will
  increase total revenue.
• The percentage change in quantity demanded is
  less than the percentage change in price.

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Inelastic Demand

• Inelastic demand exists when a small percentage
  decrease in price produces a smaller percentage
  increase in quantity demanded. For example,
  gasoline has no substitutes, and is price
  inelastic.
• Example - people are willing to pay the cost of
  life saving drugs - or - status symbols - so a
  price increase decreases demand by a smaller
  percentage.

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5. A marketing manager reduced the price on a
brand of cereal by 10 percent and observed a 25
percent increase in quantity sold.  The manager
then thought that if the price were reduced by
another 20 percent, a 50 percent increase in
quantity sold would occur.  What would be your
response to the marketing manager's reasoning?

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5. A marketing manager reduced the price on a
brand of cereal by 10 percent and observed a 25
percent increase in quantity sold.  The manager
then thought that if the price were reduced by
another 20 percent, a 50 percent increase in
quantity sold would occur.  What would be your
response to the marketing manager's reasoning?

• The marketing manager is reasoning that if he
  doubles the price cut on the brand of cereal,
  then quantity sold will also double. 
• This would imply that the actual demand curve for
  this particular product is a straight line and
  that price elasticity of demand is the same over
  all possible prices of the product.  However, in
  actuality, demand curves are generally convex and
  price elasticity varies at different prices along
  the demand curve.

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Convex Demand Curve
P r I c e
Quantity
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6. A student theater group at a university has
developed a demand schedule that shows the
relationship between ticket prices and demand
based on a student survey, as follows

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6. A student theater group at a university has
developed a demand schedule that shows the
relationship between ticket prices and demand
based on a student survey, as follows

• Number of Students
• Ticket Price Who Would Buy
• 1 300
• 2 250
• 3 200
• 4 150
• 5 100

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6a. Graph the demand curve and the total revenue
curve based on these data.  What ticket price
might be set based on this analysis?

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6a. Graph the demand curve and the total revenue
curve based on these data.  What ticket price
might be set based on this analysis?

• DEMAND CURVE
• 5 x
• 4 x
• 3 x
• Price 2 x
• 1 x
• 0 ________________________
• 100 150 200 250 300
• Quantity Sold

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6a. Graph the demand curve and the total revenue
curve based on these data.  What ticket price
might be set based on this analysis?

• TOTAL REVENUE CURVE
• 600 x x
• 500 x x
• 400
• Total 300 x
• Revenue 200
• 100 ___________________________
• 100 150 200 250 300
• Quantity Sold

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6a. Graph the demand curve and the total revenue
curve based on these data.  What ticket price
might be set based on this analysis?

• Based on this analysis, ticket price could be set
  at 3.  At this price, total revenue is highest
  and audience size is maximized.
• The total revenue is the same at 4, but costs
  are lower and profitability may be higher.

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6b. What other factors should be considered
before the final price is set?

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6b. What other factors should be considered
before the final price is set?

• Other factors that should be considered include
  the total costs of the theater production, the
  seating capacity of the theater, the
  responsibility of the theater to charge a price
  that all students can afford, and the sale of
  other products such as programs, candy, tickets
  for the next event.
• Answer - 3 or 4 depending on your goals.

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7. Touchè Toiletries, Inc., has developed an
addition to its Lizardman Cologne line
tentatively branded Ode of d'Toadè
Cologne. Unit variable costs are 45 cents for a
3-ounce bottle, and heavy advertising
expenditures in the first year would result in
total fixed costs of 900,000. Ode d'Toadè
Cologne was priced at 7.50 for a 3-ounce
bottle.  How many bottles of Ode d'Toadè must be
sold to break even?

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Q 7. Breakeven Analysis

• Break-Even Quantity Fixed
  Costs_____
• Price - Unit Variable Cost
• BEQ 900,000__
• 7.50 - 0.45
• BEQ 127,660 units

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8. Suppose that marketing executives for Touchè
Toiletries reduced the price to 6.50 for a
3-ounce bottle of Ode d'Toadè and the fixed costs
were 1,100,000.  Suppose further than the unit
variable cost remained at 45 cents for a 3-ounce
bottle.(a) How many bottles must be sold to
break even?(b) What dollar profit level would
Ode d'Toadè achieve if 200,000 bottles were sold?
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Q8a. How many bottles must be sold to break
even?

• BEQ Fixed Costs_____
  
• Price - Unit Variable Cost
• BEQ 1,100,000
• 6.50 - 0.45
• BEQ 181,818 units

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Q8b. What dollar profit level would Ode d'Toadè
achieve if 200,000 bottles were sold?

• Profit Total Revenue - Total Cost
• (P X Q) - FC (UVC X Q)
• (6.50 X 200,000) - 1,100,000
  (.45 X 200,000)
• 1,300,000 - (1,100,000 90,000)
• 110,000

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9.Executives of Random Recordings, Inc.,
produced an album entitled Sunshine/Moonshine by
the Starshine Sisters Band.  The cost and price
information was as followsAlbum cover 1.00
per albumSongwriter's royalties 0.30 per
albumRecording artists' royalties 0.70 per
albumDirect material and labor costs 1.00 per
albumFixed cost of producing album 100,000.00
(advertising, studio fee, etc.)Selling
price 7.00 per album
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9a. Prepare a chart like Figure 14-10 showing
total cost, fixed cost, and total revenue for
album quantity sold levels starting at 10,000
albums through 100,000 albums at 10,000 album
intervals, that is, 10,000, 20,000, 30,000, and
so on.9b. What is the break-even point for the
album?
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9a. Prepare a chart like Figure 14-10 showing
total cost, fixed cost, and total revenue for
album quantity sold levels starting at 10,000
albums through 100,000 albums at 10,000 album
intervals, that is, 10,000, 20,000, 30,000, and
so on.9b. What is the break-even point for the
album?Answer The breakdown point is 25,000
units (see handout)
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Do We Need A Break or Should We keep Going?

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Answers To Chapter 15 Questions

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1. Under what condition would a camera
manufacturer adopt a skimming price approach for
a new product? A penetration approach?
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1. Under what condition would a camera
manufacturer adopt a skimming price approach for
a new product? A penetration approach?

• A camera manufacturer might adopt a skimming
  price approach for a new product if the new
  product is unique and already has a significant
  prospective customer base. Some type of
  protection from competitive products such as a
  patent would also enhance the effectiveness of a
  skimming strategy. Skimming means a higher price
  for the product.

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1. Under what condition would a camera
manufacturer adopt a skimming price approach for
a new product? A penetration approach?

• A penetration price approach might be adopted if
  the new product unit production and marketing
  cost fall dramatically as production volume
  increased and if many segments of market are
  price-sensitive. Such a product would most
  likely appeal to a broad segment of the
  population and be positioned as a "me-too" type
  product. A penetration price is usually a lower
  price.

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2. What are some similarities and differences
between skimming pricing, prestige pricing, and
above-market pricing?
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2. What are some similarities and differences
between skimming pricing, prestige pricing, and
above-market pricing?

• Skimming, prestige, and above-market pricing all
  involve setting a premium price for a product,
  hoping consumers will associate high quality with
  high price. Generally, these three pricing
  strategies are most effective when product demand
  is inelastic.

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2. What are some similarities and differences
between skimming pricing, prestige pricing, and
above-market pricing?

• Frequently, a skimming price approach is used
  when there are no competitively positioned
  products, and therefore, prices, to use as a
  benchmark, while an above-market price strategy
  requires a competitive reference point or price.
  Prestige pricing, on the other hand, typically
  requires a greater subjective component than the
  other two methods. A Rolex.

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3.A producer of microwave ovens has adopted an
experience curve pricing approach for its new
model. The firm believes it can reduce the cost
of producing the model by 20 percent each time
volume doubles. The cost to produce the first
unit was 1000. What would be the approximate
cost of the 4,096th unit?
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3. What would be the approximate cost of the
4,096th unit?

• UNIT COST UNIT2 COST
• 1 1,000 128 (.80) (262) 210
• 2 (.80) (1,000) 800 256 (.80) (210)
  168
• 4 (.80) ( 800) 640 512 (.80) (168)
  134
• 8 (.80) ( 640) 512 1024 (.80) (134)
  107
• 16 (.80) ( 512) 410 2048 (.80) (107)
  86
• 32 (.80) ( 410) 328 4096 (.80) ( 86)
  68
• 64 (.80) ( 328) 262

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4. The Hesper Corporation is a leading
manufacturer of high-quality upholstered sofas.
Current plans call for an increase of 600,000 in
the advertising budget. If the firm sells its
sofas for an average price of 850 and the unit
variable costs are 550, then what dollar sales
increase will be necessary to cover the
additional advertising?
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4. What dollar sales increase will be necessary
to cover the additional advertising?

• Incremental number of units Incremental
  Fixed Cost
• Price - Unit Variable Cost
• 2,000 units 600,000
• 850-550
• The dollar sales increase necessary to cover the
  increased fixed cost is
• 2,000 units x 850 1,700,000

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5. Suppose executives estimate that the unit
variable cost for their VCR is 100, the fixed
cost related to the product is 10 million
annually, and the target volume for next year
is 100,000 recorders. What sales price will be
necessary to achieve a target profit of 1
million?
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5. What sales price will be necessary to achieve
a target profit of 1 million?

• Profit Total Revenue - Total Cost
• Profit (P x Q) - FC (UVC x Q)
• 1,000,000 (P x 100,000) - 10,000,000
  (100x100,000)
• 1,000,000 100,000 P - (10,000,000
  10,000,000
• 100,000 P 21,000,000
• Price 210

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6. A manufacturer of motor oil has a trade
discount policy whereby the manufacturers
suggested retail price is 30 per case with the
terms of 40/20/10.The manufacturer sells its
products through jobbers, who sell to
wholesalers, who sell to gasoline stations.
What will the manufacturer's sales price be?
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6. What will the manufacturer's sales price be?

• Terms 40/20/10
• Manufacturers suggested retail price (MRP) 30
• Subtract 40 of MRP 12
• Retail cost .. 18
• Subtract 20 of retail cost 3.60
• Wholesale cost ... 14.40
• Subtract 10 of wholesale cost 1.44
• Jobber cost or manufacturer's sale price
  ... 12.96

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7. What are the effective annual interest rates
for the following cash discount terms? (a)
1/10, net 30, (b) 2/10, net 30, and (c)
2/10, net 60?
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7. What are the effective annual interest rates
for the following cash discount terms?

• a. .01 x 360 18
• 30-10
• b. .02 x 360 36
• 30-10
• c. .02 x 360 14.4
• 60-10

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8. Suppose a manufacturer of exercise equipment
sets a suggested price to the consumer of 395
for a particular piece of equipment to be
competitive with similar equipment. The
manufacturer sells its equipment to a sporting
goods wholesaler who receives a 25 percent markup
and a retailer who receives a 50 percent markup.
What demand-based pricing method is being used,
and at what price will the manufacturer sell the
equipment to the wholesaler?
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8. What demand-based pricing method is being
used, and at what price will the manufacturer
sell the equipment to the wholesaler?

• The pricing method is being used in this case is
  a demand-backward pricing method.
• Suggested retail price 395.00 . wholesale price
  197.50
• retail markup () x .00 wholesale
  markup .25
• retailer markup 197.50 49.37
• 395.00 197.00
• retailer cost 197.50 49.37 wholesaler
  cost 197.50 148.13 manufacturer's
  sales price

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9. Is there any truth in the statement,
"Geographic pricing schemes will always be
unfair to some buyers"? Why or why not?
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9. Is there any truth in the statement,
"Geographic pricing schemes will always be unfair
to some buyers"? Why or why not?

• Unless a geographic pricing scheme individually
  figures transportation charges for each
  wholesaler and retailer in the distribution
  channel, some buyers will be priced "unfairly"
  due to the uniform pricing schemes.