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Chap014.RTF - Cal State LA

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					                                    CHAPTER 14
                            ARRIVING AT THE FINAL PRICE

                            MULTIPLE CHOICE QUESTIONS


14-1 CHAPTER OPENING EXAMPLE: DURACELL                                              CONCEPTUAL

    Which of the following statements about pricing policy used by Duracell Ultra with M3
    Technology when it introduced the product to the market is true?
    a. Duracell obviously used market penetration to gain as large a market share as possible for
        its batteries.
    b. Duracell used target pricing because it was in the introduction stage of its product life cycle.
    c. If the Duracell Ultra with M3 Technology is viewed as a new product category, then
        Duracell used skimming pricing.
    d. Duracell chose to use customary pricing for the new alkaline batteries.
    e. None of the above statements about the pricing policy used by Duracell is true.

    Answer: c Page: 365-366
    Rationale: The introductory price for the Duracell Ultra was 25 percent higher than Duracell's
    other alkaline batteries, and it was priced to create value for consumers.

14-2 CHAPTER OPENING EXAMPLE: DURACELL                                              CONCEPTUAL

    Duracell Ultra alkaline batteries with M3 technology:
    a. give Duracell a competitive advantage.
    b. would be in the same product life cycle stage as regular alkaline batteries.
    c. would not meet the federal guidelines for identifying a new product.
    d. use a price penetration strategy.
    e. are a good example of a new product failure.

    Answer: a Page: 365-366
    Rationale: This question will require students to remember previously learned concepts. The
    Duracell Ultra is more likely in an introductory stage while regular alkaline batteries are in the
    mature stage of the product life cycle. The Duracell Ultra batteries would be an example of a
    highly successful new product. Its price would be low relative to other alkaline batteries if it
    was using penetration pricing—but it did the opposite. It is a competitive advantage because the
    M3 Technology is patentable.




                                               798
14-3 THE PRICE-SETTING PROCESS                                                       CONCEPTUAL

    In which step of the price setting process would a new-product manager be deciding whether to
    adopt a penetration or a skimming pricing strategy for a new product she is about to introduce to
    the market?
    a. Make special adjustments to the list or quoted price.
    b. Select an approximate price level.
    c. Estimate demand and revenue.
    d. Identify price constraints and objectives.
    e. Set list or quoted price.

    Answer: b Page: 366 Other Locations: SG
    Rationale: The decision between skimming and penetration pricing is a demand-based
    approach, part of step 4 in the price setting process.

14-4 SKIMMING PRICING                                                                   DEFINITION

    Setting the highest initial price that customers really desiring the product are willing to pay is:
    a. skimming pricing.
    b. penetration pricing.
    c. price lining.
    d. odd-even pricing.
    e. prestige pricing.

    Answer: a Page: 366
    Rationale: Key term definition—skimming pricing

14-5 SKIMMING PRICING                                                                   DEFINITION

    Skimming pricing is a strategy that introduces a new or innovative product by:
    a. setting the price 10 percent below its nearest competitor.
    b. determining if the product is supply inelastic.
    c. creating a product image that appeals to fiscally-conservative consumers.
    d. setting a high initial price.
    e. setting a low initial price.

    Answer: d Page: 366
    Rationale: Key term definition—skimming pricing




                                               799
14-6 SKIMMING PRICING                                                                 CONCEPTUAL

    A skimming pricing policy is likely to be most effective when:
    a. consumers perceive your product to be similar to other products on the market.
    b. a lower price will have a major effect on reducing unit costs.
    c. competitors will be attracted to the market due to the potential for high sales revenues.
    d. consumers tend to be price sensitive.
    e. none of the above is true.

    Answer: e Page: 366-367 Other Locations: W
    Rationale: A skimming pricing strategy, which entails setting a high initial price, is most
    effective when customers are willing to buy immediately at the high initial price. Lowering the
    price has only a minor effect on increasing sales volume and reducing unit costs when the high
    initial prices do not attract competitors, and when customers interpret high price as signifying
    high quality.

14-7 SKIMMING PRICING                                                                 APPLICATION

    Hallmark was the official supplier of flowers at the last Winter Olympics. It was the first time
    that it has participated in the Olympics. Hallmark presented each Olympic winner with a
    special bouquet of roses designed to resemble the Olympic torch. Consumers can buy a smaller
    version of this same bouquet at the Hallmark website for $74.95. The Olympic bouquet that
    consumers can buy contains two dozen yellow roses, yet you can buy two dozen yellow roses
    for less than $35 at most supermarkets. If Hallmark is treating the Olympic bouquet as an
    innovative product, then it is using which demand-oriented approach to pricing
    a. bundle pricing
    b. yield management pricing
    c. skimming pricing
    d. target return-on-sales pricing
    e. penetration pricing

    Answer: c Page: 366
    Rationale: Skimming pricing is appropriate when there are enough prospective customers who
    are willing to buy the product immediately at the high price, the high initial price will not attract
    competitors, and customers interpret the high price as signifying high quality (playing off the
    prestige associated with the Olympics).




                                                800
14-8 SKIMMING PRICING                                                              CONCEPTUAL

    The manufacturer of a DVD-R, a recordable DVD disk that can be erased and reused, is
    thinking of using a skimming pricing strategy for its new product. Which of the following
    conditions would argue AGAINST using a skimming pricing strategy for the DVD-R disks?
    a. large potential market, even at a high price
    b. technological problems still exist for competitors
    c. increasing volume reduces production costs substantially
    d. consumers perceive a price-quality relationship
    e. all of the above

    Answer: c Page: 366-367
    Rationale: Production economies of scale and experience curve effects favor high
    production--and, hence, a penetration strategy, not a skimming strategy.

14-9 SKIMMING PRICING                                                              APPLICATION

    For precision shooting competitions, Leupold & Thomas, U.S. manufacturers of rifle scopes,
    introduced a revolutionary new patented optical system. Competitions are won by hundredths
    of an inch, so the image seen through the scope is crucial. That's why the Leupold rifle scope
    with its new optical system is designed to offer an image that is crisp, sharp, flat and second to
    none in image contrast. The initial price of the Competition Series scope will be $1,605.40.
    Which pricing strategy will best attract price-insensitive customers and help Leupold & Stevens
    recoup its research and development costs?
    a. price lining
    b. experience curve pricing
    c. customary pricing
    d. skimming pricing
    e. target pricing

    Answer: d Page: 366-367
    Rationale: The conditions favoring skimming pricing are most likely to exist when a new
    product is protected by patent or copyright or its uniqueness is understood and appreciated by
    customers.




                                              801
14-10 SKIMMING PRICING                                                              APPLICATION

     When microwave ovens were in the introduction stage of the product life cycle, some
     consumers were willing to pay exorbitant prices for the innovative ovens. Taking advantage of
     this strong consumer desire, marketers set the price for microwave ovens at the highest initial
     price that customers with a very strong desire for the product were willing to pay. Marketers of
     microwave ovens were using a _____ pricing strategy.
     a. skimming
     b. penetration
     c. prestige
     d. price lining
     e. bundle

     Answer: a Page: 366-367 Other Locations: SG
     Rationale: Skimming pricing strategies are used for new, innovative products that are highly
     sought after by a significant number of customers. Such customers are relatively insensitive to
     price because of the product's ability to satisfy their needs and wants in relation to alternative
     products. As initial consumer demand is met, the marketer lowers the price of the product to
     attract another, more price sensitive segment of the market.

14-11 DEMAND-ORIENTED APPROACHES                                                    CONCEPTUAL

     Which of the following is NOT a demand-oriented approach to pricing?
     a. prestige pricing
     b. bundle pricing
     c. price lining
     d. penetration pricing
     e. customary pricing

     Answer: e Page: 366-369
     Rationale: Customary pricing is a competition-oriented approach to pricing.

14-12 COST-ORIENTED APPROACHES                                                      CONCEPTUAL

     Which of the following is NOT a cost-oriented approach to pricing?
     a. experience curve pricing
     b. cost plus fixed fee pricing
     c. standard markup pricing
     d. loss-leader pricing
     e. cost-plus-percentage-of-cost pricing

     Answer: d Page: 370-373
     Rationale: Loss-leader pricing is a competition-oriented approach to pricing.




                                               802
14-13 COMPETITION-BASED METHODS                                                     CONCEPTUAL

     Which of the following is NOT a competition-based pricing method?
     a. loss-leader pricing
     b. below-market pricing
     c. customary pricing
     d. above-market pricing
     e. penetration pricing

     Answer: e Page: 374
     Rationale: Penetration pricing is a demand-oriented approach to pricing.

14-14 PENETRATION PRICING                                                             DEFINITION

     A company that sets a low initial price on a new product to appeal immediately to the mass
     market is using:
     a. skimming pricing.
     b. penetration pricing.
     c. price lining.
     d. odd-even pricing.
     e. prestige pricing.

     Answer: b Page: 367
     Rationale: Key term definition—penetration pricing

14-15 PENETRATION PRICING                                                           APPLICATION

     Leupold & Stevens, Inc., makes Leupold scopes for rifles and has introduced a new scope that
     has the quality and performance for which Leupold & Stevens is famous at a price much lower
     than it has ever sold a rifle scope before. The new scope offers several different magnifications
     and is the only scope in the $200 range that is made in the United States. Which pricing strategy
     is Leupold & Stevens using to appeal to a larger market?
     a. skimming pricing
     b. penetration pricing
     c. price lining
     d. odd-even pricing
     e. demand-backward pricing

     Answer: b Page: 367 Other Locations: W
     Rationale: Penetration pricing is setting a low initial price on a new product to appeal
     immediately to the mass market.




                                               803
14-16 PENETRATION PRICING                                                            CONCEPTUAL

     Penetration pricing is intended to appeal to which market?
     a. highly selective quality-seeking consumers
     b. price-insensitive markets
     c. the mass market
     d. specialty goods markets
     e. the same markets as skimming pricing

     Answer: c Page: 367 Other Locations: W
     Rationale: Penetration pricing is setting a low initial price on a new product to appeal
     immediately to the mass market.

14-17 PENETRATION PRICING                                                            CONCEPTUAL

     Which of the following statements about penetration pricing is true?
     a. Penetration pricing is a profit-oriented approach to pricing.
     b. Penetration pricing is a cost-based pricing method.
     c. Penetration pricing encourages competitors to enter a market.
     d. A penetration pricing strategy is more effective in a marketplace with price-sensitive
        consumers.
     e. Because penetration pricing is a high initial-price strategy, it will not attract competitors.

     Answer: d Page: 367
     Rationale: Penetration pricing is setting a low initial price on a new product to appeal to a mass
     market, which is price-sensitive.

14-18 PENETRATION PRICING                                                            APPLICATION

     When Hallmark cards introduced a line of $.99 cards (about half the price of the previously least
     expensive cards sold by Hallmark), the greeting card company was trying to appeal to a mass
     market that was price sensitive. Hallmark was using a _____ pricing strategy.
     a. prestige
     b. skimming
     c. penetration
     d. demand-backward
     e. experience-curve

     Answer: c Page: 367 Other Locations: SG
     Rationale: Penetration pricing is the setting of a low initial price on a new product (inexpensive
     greeting cards) to appeal immediately to the mass market.




                                                804
14-19 PENETRATION PRICING                                                            APPLICATION

     The manufacturer of a new kind of fat-free ice cream that has the consistency and taste of
     regular ice cream is thinking of using a skimming pricing strategy for its new product. Which of
     the following conditions would argue AGAINST using a skimming pricing strategy for the tasty
     fat-free ice cream?
     a. The ice cream market is highly conservative.
     b. A large portion of the market has inelastic demand for ice cream—over a fairly broad range
          of prices.
     c. Economies of scale in production are substantial.
     d. Retailers are willing to pay for new brands of premium ice cream in an overcrowded
          category.
     e. Once the initial price is set, it is nearly impossible to lower price because of the possibility
          of alienating early buyers.

     Answer: b Page: 367
     Rationale: Inelastic demand would result in small sales increases due to lower price, in which
     case a skimming strategy--not a penetration strategy, would be best.

14-20 PRESTIGE PRICING                                                                  DEFINITION

     A manufacturer using _____ is setting a high price so that status-conscious consumers will be
     attracted to the product and buy it.
     a. skimming pricing.
     b. penetration pricing.
     c. price lining.
     d. odd-even pricing.
     e. prestige pricing.

     Answer: e Page: 367-368
     Rationale: Key term definition—prestige pricing

14-21 PRESTIGE PRICING                                                               APPLICATION

     Chico's sells women's sportswear. A simple tank top with the Chico's label costs $48. If you
     know you simply want a tank top, you can buy a tank top for $5 at a Family Dollar Store, but it
     won't have the Chico's label. What kind of demand-oriented approach to pricing is being used
     by this manufacturer?
     a. experience curve pricing
     b. target market share pricing
     c. demand-backward pricing
     d. prestige pricing
     e. flexible pricing

     Answer: d Page: 367-368 Other Locations: W
     Rationale: Prestige pricing involves setting a high price so that quality- or status-conscious
     consumers will be attracted to the product and buy it. Chico's is obviously hoping to attract that
     market.




                                                805
14-22 PRESTIGE PRICING                                                              APPLICATION

     Bijan's in New York City has offered a five-piece set of crocodile luggage for $55,000. This is
     an example of _____ pricing.
     a. penetration
     b. prestige
     c. odd-even
     d. experience curve
     e. loss-leader

     Answer: b Page: 367-368
     Rationale: Prestige pricing involves setting a high price so the quality- or status-conscious
     consumers will be attracted to the product and buy it.

14-23 PRESTIGE PRICING                                                              APPLICATION

     You can buy a General Electric dishwasher for $399, or you can buy a similar sized
     under-the-counter Bosch brand dishwasher for $989. Since Bosch uses its pricing strategy to
     project a product image, it is most likely using _____ pricing.
     a. bait and switch
     b. standard markup
     c. prestige
     d. penetration
     e. cost plus fixed-fee

     Answer: c Page: 367-368
     Rationale: Prestige pricing is an appropriate strategy for items for which a marketer wants to
     project a quality image. In essence, it is a useful approach when the item carries a price that
     suggests a high quality.

14-24 PRESTIGE PRICING                                                                DEFINITION

     The demand curve for which type of pricing method slopes downward and to the right, then
     turns back to the left?
     a. skimming pricing
     b. penetration pricing
     c. price lining
     d. demand-backward pricing
     e. prestige pricing

     Answer: e Page: 368 Other Locations: SG
     Rationale: Prestige pricing involves setting a high price so that status-conscious consumers will
     be attracted to the product and buy it. The demand curve slopes downward and to the right, but
     turns back to the left when it goes low enough to lose the ability to suggest status.




                                               806
14-25 PRICE LINING                                                                     DEFINITION

     When using a price lining strategy, a retailer will:
     a. set price slightly higher than absolutely necessary to protect against losses from
        environmental factors.
     b. adjust the price of a product so it is "in line" with that of its largest competitor.
     c. set the price of a line of products at a number of different specific pricing points.
     d. add a fixed percentage to the cost of all items in a specific product class.
     e. set prices to achieve a profit that is a specified percentage of the sales volume.

     Answer: c Page: 368
     Rationale: Key term definition—price lining

14-26 PRICE LINING                                                                     DEFINITION

     The assumption that demand is elastic at a number of price points but is inelastic between these
     price points leads to which approach to pricing?
     a. target pricing
     b. skimming pricing
     c. penetration pricing
     d. price lining
     e. odd-even pricing

     Answer: d Page: 368 Other Locations: W
     Rationale: Often a firm that is selling not just a single product but a line of products may price
     them at a number of different specific pricing points, which is called price lining. As shown in
     Figure 14-3B, that demand is elastic at each of these price points but inelastic between them.

14-27 PRICE LINING                                                                   CONCEPTUAL

     Which of the following statements about price lining is true?
     a. This method assumes that demand is elastic at each price point used.
     b. Primarily government contractors use this method.
     c. Those who use this method prefer to have at least a dozen different price points.
     d. This method assumes demand is elastic between the price points.
     e. All the above statements about price lining are true.

     Answer: a Page: 368
     Rationale: Price lining is a method used by firms selling a line of products, and having different
     price points for groups of products within the line. The method assumes demand is elastic at
     each of the price points, but is inelastic between the price points.




                                               807
14-28 ODD-EVEN PRICING                                                                   DEFINITION

     Odd-even pricing is:
     a. setting prices one way for product lines and another way for individual brands.
     b. setting prices of luxury items at even price points and setting the price of necessities at odd
        price points.
     c. setting prices a few dollars or cents under an even number.
     d. a method of pricing where price often falls following the reduction of costs associated with
        the firm's production experience.
     e. adding a fixed percentage to the cost of all items in a specific product class.

     Answer: c Page: 368
     Rationale: Key term definition—odd-even pricing

14-29 ODD-EVEN PRICING                                                                CONCEPTUAL

     Odd-even pricing is most closely related to:
     a. retailers' perceptions of price.
     b. customers' perceptions of price.
     c. wholesalers' markups.
     d. manufacturers' costs.
     e. cost of product facilitation to market.

     Answer: b Page: 368
     Rationale: Odd-even pricing involves setting price a few dollars or cents under an even
     number. For example, customers see an item priced at $4.99 as "something over $4.00" rather
     than "about $5.00." The customers' perception of price is the influential factor.

14-30 ODD-EVEN PRICING                                                                CONCEPTUAL

     The prices for all fruit trees sold in Stark Bros. fruit trees and landscaping catalog end in $.99.
     Stark Bros. uses:
     a. odd-even pricing.
     b. dynamic pricing.
     c. price lining.
     d. bundle pricing.
     e. experience curve pricing.

     Answer: a Page: 368 Other Locations: W
     Rationale: Odd-even pricing involves setting prices a few dollars or cents under an even
     number.




                                                808
14-31 TARGET PRICING                                                                   DEFINITION

     _____ is a method of setting price by estimating the price consumers would be willing to pay for
     the item and then working backward to assure necessary margins for the retailers and
     wholesalers.
     a. Penetration pricing
     b. Price lining
     c. Cost plus percentage-of-cost pricing
     d. Cost plus fixed fee pricing
     e. Target pricing

     Answer: e Page: 368 Other Locations: SG
     Rationale: This involves setting price by estimating the price consumers would be willing to
     pay, and then working backward through margins for intermediaries to determine the price to
     charge. This often results in deliberate adjustment of the quality of component parts to achieve
     the target price.

14-32 TARGET PRICING                                                                   DEFINITION

     Target pricing is the result of a manufacturer _____ in a product to achieve the target price.
     a. setting the highest costs possible
     b. deliberately adjusting the cost and quality of the component parts
     c. researching what mark-ups wholesalers will accept
     d. studying competitive prices and making fixed-cost adjustments
     e. relying on a jury of executive opinion to establish cost factors

     Answer: b Page: 368
     Rationale: Key term definition—target pricing

14-33 TARGET PRICING                                                                CONCEPTUAL

     The Swedish manufacturer of Asko dishwashers concluded that consumers would be willing to
     pay approximately $989 for a dishwasher that was quieter than any other machine on the
     market. Based on this price, Asko determined the margins that would have to be allowed for
     wholesalers and retailers to give the $989 retail price. Asko used:
     a. prestige pricing.
     b. price lining.
     c. cost-plus pricing.
     d. target pricing.
     e. customary pricing..

     Answer: d Page: 368
     Rationale: Target pricing is setting a price by estimating the price consumers would be willing
     to pay for the product, then working backward through margins for retailers and wholesalers to
     achieve the targeted retail price.




                                               809
14-34 TARGET PRICING                                                               CONCEPTUAL

     Which of the following pricing techniques is most sensitive to customers' responses to price?
     a. cost-plus-percentage-of-cost pricing
     b. experience curve pricing
     c. cost plus fixed fee pricing
     d. target pricing
     e. standard markup pricing

     Answer: d Page: 368
     Rationale: Alternatives a, b, c, and e are cost-oriented approaches, so consumer demand is
     irrelevant. Target pricing is demand-based and focused on what consumers are willing to pay.

14-35 MARKETING NEWSNET                                                            APPLICATION

     In response to Duracell's introduction of the Duracell Ultra battery, Energizer introduced an
     Advanced Formula battery, but unlike Duracell, Energizer priced its batteries at a low initial
     price to attract the mass market. Energizer used:
     a. penetration pricing.
     b. prestige pricing.
     c. skimming pricing.
     d. price lining.
     e. cost plus fixed fee pricing.

     Answer: a Page: 369
     Rationale: Penetration pricing is setting a low initial price of a new product—the strategy
     Energizer chose.

14-36 MARKETING NEWSNET                                                            CONCEPTUAL

     In response to Duracell's introduction of the Duracell Ultra battery, Energizer introduced an
     Advanced Formula battery, but unlike Duracell, Energizer priced its batteries at a low initial
     price to attract the mass market. Was Energizer's strategy to steal market share from Duracell a
     success?
     a. No, because consumers equate quality of batteries with higher prices.
     b. No, because retailers did not respond appropriately to the target market pricing strategy.
     c. No, because consumers are price-insensitive when it comes to batteries.
     d. Yes, because consumers typically respond positively to cost-plus pricing.
     e. Yes, because the demand for batteries has unitary elasticity.

     Answer: a Page: 369
     Rationale: Answer a is what happened because with batteries consumers believe there is a
     price-quality relationship, which makes answers c and e incorrect. Answer b is incorrect
     because there is no indication Energizer set a target price and adjusted cost and quality
     components to maintain wholesaler and retailer margins. Answer d involves cost-oriented
     pricing, which is irrelevant here.




                                               810
14-37 BUNDLE PRICING                                                                  DEFINITION

     _____ is the marketing of two or more products for a single "package" price.
     a. Packaged pricing
     b. Loss-leader pricing
     c. Bundle pricing
     d. Tie-in pricing
     e. Multi-product pricing

     Answer: c Page: 369
     Rationale: Key term definition—bundle pricing

14-38 BUNDLE PRICING                                                                CONCEPTUAL

     If you were to buy five dwarf peach trees from the Stark Bros. fruit trees and landscaping
     catalog in five separate orders, you will pay $108.99, but if you order its assortment (1 each of
     five different dwarf peach trees), you pay $89.99. Stark Bros. uses:
     a. standard markup pricing.
     b. bundle pricing.
     c. prestige pricing.
     d. price lining.
     e. demand-backward pricing.

     Answer: b Page: 369 Other Locations: SG
     Rationale: This is an example of bundle pricing--the marketing of the five dwarf trees at a
     single "package" price.

14-39 BUNDLE PRICING                                                                APPLICATION

     A computer retailer shrink-wraps Microsoft Works to his private label Pentium IV computer
     and sells the microcomputer and software for $2,500.00. This pricing scenario might best be
     described as:
     a. price lining.
     b. loss-leader pricing.
     c. customary pricing.
     d. prestige pricing.
     e. bundle pricing.

     Answer: e Page: 369
     Rationale: The retailer is selling two products for a "package" price, which is bundle pricing.




                                               811
14-40 BUNDLE PRICING                                                                APPLICATION

     A bottle of shampoo shrink-wrapped with a bottle of conditioner for 10 cents more than the
     regular price of the shampoo is an example of _____ pricing.
     a. penetration
     b. prestige
     c. bundle
     d. odd-even
     e. standard mark-up

     Answer: c Page: 369 Other Locations: W
     Rationale: Bundle pricing is the marketing of two or more products at a single package price,
     the situation here.

14-41 YIELD MANAGEMENT PRICING                                                         DEFINITION

     _____ is charging different prices to maximize revenue for a set amount of capacity at any given
     time.
     a. Demand backward pricing
     b. Target pricing
     c. Yield management pricing
     d. Skimming pricing
     e. Penetration pricing

     Answer: c Page: 369
     Rationale: Key term definition—yield management pricing

14-42 YIELD MANAGEMENT PRICING                                                      APPLICATION

     One problem in the interstate trucking industry is the number of trucks that return after making a
     delivery with an empty truck. There is a website where independent interstate truckers can look
     for loads that they can carry with them on their return trip. Because the trucks would be
     returning empty (and inefficiently), truckers, who use this website to get business that they
     would not have had without it, give a reduced shipping rate. This reduced rate is an example of:
     a. yield management pricing.
     b. penetration pricing.
     c. target pricing.
     d. cost plus pricing.
     e. odd-even pricing.

     Answer: a Page: 369
     Rationale: This yield management pricing benefits independent truckers because they can
     obtain some revenue from carrying loads in trucks that would otherwise be empty. In this case,
     charging different prices for loads on a return trip enables them to increase/maximize revenue
     on their return trip that would otherwise be zero.




                                               812
14-43 COST-ORIENTED APPROACHES                                                       CONCEPTUAL

     Which of the following statements about cost-oriented approaches is true?
     a. These methods focus on the demand side of the pricing problem and involve stimulating
        demand and decreasing revenue.
     b. These methods focus on the supply side of the pricing problem and involve considerations
        of production and marketing expenses.
     c. Target return on investment is an example of a cost-based method.
     d. Experience curve pricing is simple to use because costs predictably decrease by 25 percent
        with each doubling of production.
     e. Cost-oriented approaches are subcategories of competition-based methods so revenues are
        a critical factor.

     Answer: b Page: 370-371 Other Locations: W
     Rationale: Cost-oriented approaches focus on the supply side of pricing. They focus on
     covering production costs, marketing costs, overhead, and profit. Target return on investment is
     a profit-based method. Costs do not always decrease by 25 percent with an experience curve
     effect. Cost-oriented approaches are not a subdivision of competition-based methods.

14-44 STANDARD MARKUP PRICING                                                           DEFINITION

     Standard markup pricing:
     a. adjusts the price of a product so it is "in line" with that of its largest competitor.
     b. sets the price of a line of products at a number of different price points.
     c. adds a fixed percentage to the cost of all items in a specific product class.
     d. sets prices to achieve a profit that is a specified percentage of the sales volume.
     e. increases the price slightly to protect against undue profit losses from unforeseen
         environmental factors.

     Answer: c Page: 370
     Rationale: Key term definition—standard markup pricing

14-45 STANDARD MARKUP PRICING                                                           DEFINITION

     Which cost-based pricing method entails adding a fixed percentage to the cost of all items in a
     specific product class?
     a. experience curve pricing
     b. cost plus fixed-fee pricing
     c. demand backward pricing
     d. standard markup pricing
     e. target profit pricing

     Answer: d Page: 370 Other Locations: SG
     Rationale: Key term definition—standard markup pricing




                                                813
14-46 STANDARD MARKUP PRICING                                                         APPLICATION

     Woodsgift Farm sells floral jellies—jellies made from pansies, honeysuckle, wisteria, and other
     flowers. To price its jellies, the owners of the farm, add 30 percent to the cost of everything that
     goes into making the jellies including their salaries, jars, sugar, and pectin. What is this pricing
     method called?
     a. target return-on-sales pricing
     b. flexible pricing
     c. cost-plus-fixed-fee pricing
     d. standard markup pricing
     e. customary pricing

     Answer: d Page: 370 Other Locations: W
     Rationale: Standard markup pricing adds a fixed percentage to the cost of all items in a specific
     product class—in this case, floral jellies.

14-47 STANDARD MARKUP PRICING                                                         APPLICATION

     Assume it costs Lady Marion Seafood, Inc. $30 to catch, process, freeze, package, and ship
     5-pound packages of Alaskan salmon. It uses a 60 percent markup on its salmon products and
     charges customers $48 for a postage-paid vacuum-sealed package. What type of pricing does
     Lady Marion Seafood use?
     a. target return-on-sales pricing
     b. cost-plus-fixed-fee pricing
     c. standard markup pricing
     d. target profit pricing
     e. customary pricing

     Answer: c Page: 370
     Rationale: Standard markup pricing adds a fixed percentage to the cost of all items in a specific
     product class (5-pound packages of salmon).

14-48 COST-PLUS PRICING                                                                  DEFINITION

     What type of pricing involves summing the total unit cost of providing a product or service and
     adding a specific amount to the cost to arrive at the price?
     a. standard markup pricing
     b. experience curve pricing
     c. cost-plus pricing
     d. penetration pricing
     e. bundle pricing

     Answer: c Page: 370
     Rationale: Key term definition—cost-plus pricing




                                                814
14-49 COST-PLUS PRICING                                                                DEFINITION

     The two variations of cost-plus pricing are:
     a. cost-plus percentage-of-cost pricing and cost-plus fixed-fee pricing.
     b. cost-plus ROI pricing and cost-minus markdown pricing.
     c. target return on sales pricing and target return on investment pricing.
     d. cost-plus fixed-fee pricing and cost-plus variable-fee pricing.
     e. dynamic pricing and one-price pricing.

     Answer: a Page: 370 Other Locations: W
     Rationale: Key term definition—cost-plus pricing

14-50 COST-PLUS PRICING                                                             APPLICATION

     Rather than billing clients by the hour, some lawyers and their clients agree on a fixed fee based
     on expected costs plus a profit for the law firm. Which pricing method are they using?
     a. target pricing
     b. cost-plus pricing
     c. customary pricing
     d. experience curve pricing
     e. bundle pricing

     Answer: b Page: 370
     Rationale: The rising cost of legal fees has prompted some law firms to adopt a cost-plus
     pricing approach.

14-51 COST-PLUS-PERCENTAGE-OF-COST PRICING                                             DEFINITION

     _____ is setting the price of a product or service by adding a fixed percentage of the production
     or construction costs.
     a. Cost-plus-fixed-fee pricing
     b. Cost-plus-percentage-of-cost pricing
     c. Demand backward pricing
     d. Experience curve pricing
     e. Target return on investment pricing

     Answer: b Page: 370
     Rationale: Text term definition—cost-plus-percentage-of-cost pricing




                                               815
14-52 COST-PLUS-PERCENTAGE-OF-COST PRICING                                           DEFINITION

     When a firm is hired to construct a world-class golf course, it is a one-of-a-kind project and
     often requires unforeseen expenses. Companies that contract to build golf courses typically add
     a fixed percentage to the total unit cost to take care of these unplanned costs. This pricing
     method is called:
     a. competition-oriented pricing.
     b. target return-on-investment pricing.
     c. target return-on-sales pricing.
     d. cost-plus-fixed-fee pricing.
     e. cost-plus-percentage-of-cost pricing.

     Answer: e Page: 370 Other Locations: SG
     Rationale: Text term definition—cost-plus-percentage-of-cost pricing

14-53 COST-PLUS-PERCENTAGE-OF-COST PRICING                                         CONCEPTUAL

     Which of the following businesses is most likely to use cost-plus-percentage-of-cost pricing?
     a. realty agency
     b. architect
     c. insurance company
     d. power company
     e. amusement park

     Answer: b Page: 370
     Rationale: Cost-plus-percentage-of-cost pricing is setting the price a product or service by
     adding a fixed percentage to the production or construction costs involved in a project, the
     pricing approach often used by many architects.

14-54 COST-PLUS-FIXED-FEE PRICING                                                    DEFINITION

     _____ is a pricing method where a supplier is reimbursed for all costs, regardless of what they
     may be, plus a set earlier-agreed-on dollar amount that is independent of the final cost of the
     project.
     a. Target return on investment pricing
     b. Cost-plus-percentage-of-cost pricing
     c. Target return on sales pricing
     d. Experience curve pricing
     e. Cost-plus-fixed-fee pricing

     Answer: e Page: 370
     Rationale: Text term definition—cost-plus-fixed-fee pricing




                                               816
14-55 COST-PLUS-FIXED-FEE PRICING                                                   CONCEPTUAL

     The Brazilian government wants to build a global satellite transmission system. The
     manufacturer will receive $500,000 above actual development costs, whatever they may be.
     Payment to the manufacturer of the satellite transmission system will be determined using:
     a. standard markup pricing.
     b. experience curve pricing.
     c. cost-plus-percentage-of-cost pricing.
     d. cost-plus-fixed-fee pricing.
     e. bundle pricing.

     Answer: d Page: 370
     Rationale: Cost plus fixed-fee pricing is setting the price so the supplier is reimbursed for all
     costs, regardless of what they may be, but is allowed only a fixed amount as profit, the situation
     here.

14-56 EXPERIENCE CURVE PRICING                                                         DEFINITION

     _____ is a method of pricing where price often falls following the reduction of costs associated
     with the firm's producing and selling the an increased volume of the product.
     a. Cost-plus-percentage-of-cost pricing
     b. Marginal revenue pricing
     c. Target return on investment pricing
     d. Experience curve pricing
     e. Target return on sales pricing

     Answer: d Page: 371
     Rationale: Key term definition—experience curve pricing

14-57 EXPERIENCE CURVE PRICING                                                      CONCEPTUAL

     Which cost-based pricing method holds that a product's unit costs predictably decline by 10 to
     30 percent each time the firm's production volume doubles?
     a. experience curve pricing
     b. cost-plus-percentage-of-cost pricing
     c. cost-plus-fixed-fee pricing
     d. standard markup pricing
     e. demand-backward pricing

     Answer: a Page: 371
     Rationale: Experience curve pricing is a method of pricing in which price often falls following
     the reduction of costs associated with the firm's experience in producing or selling a product.




                                               817
14-58 EXPERIENCE CURVE PRICING                                                        APPLICATION

     The retail price of laser printers has decreased from $900 to less than $200 over several years.
     This is due in large part to:
     a. skimming pricing.
     b. prestige pricing.
     c. odd-even pricing.
     d. experience curve pricing.
     e. customary pricing.

     Answer: d Page: 371 Other Locations: W
     Rationale: Experience curve pricing is a method of pricing in which price often falls following
     the reduction of costs associated with the firm's experience in producing or selling a larger
     volume of the product—the situation with laser printers.

14-59 TARGET PROFIT PRICING                                                             DEFINITION

     Target profit pricing is:
     a. adjusting the price of a product so it is "in line" with that of its largest competitor.
     b. setting the price of a line of products at a number of different price points.
     c. adding a fixed percentage to the cost of all items in a specific product class.
     d. setting prices to achieve a profit that is a specified percentage of the sales volume.
     e. setting a price based on a specific annual dollar target volume of profit.

     Answer: e Page: 371-372 Other Locations: SG
     Rationale: Key term definition—target profit pricing

14-60 TARGET PROFIT PRICING                                                           APPLICATION

     A custom kitchen cabinet storeowner wishes to use target profit pricing to establish a price for a
     typical section of cabinets. Assume variable cost is $200 per unit, fixed cost is $44,000, and a
     target profit of $10,000 on a volume of 400 cabinets is desired? What should be charged for a
     typical cabinet section?
     a. $335.00
     b. $310.00
     c. $455.00
     d. $398.00
     e. cannot be determined from the information provided

     Answer: a Page: 372 Other Locations: W
     Rationale: Profit = total revenue - total cost. Profit = (P x Q) - [FC + (UVC x Q)].
     Thus, $10,000 = 400P - [$44,000 + ($200 x 400)], or $335.00.




                                                818
14-61 TARGET PROFIT PRICING                                                           APPLICATION

     Lady Marion Seafood, Inc. sells 5-pound packages of Alaska salmon. Assume its variable costs
     per package is $30, and its fixed cost is $250,000. It wants a target profit of $38,000 on a
     volume of 16,000 packages. What should it charge for a five-pound package of salmon?
     a. $25.00
     b. $30.00
     c. $40.00
     d. $48.00
     e. $55.00

     Answer: d Page: 372
     Rationale: Profit = total revenue - total cost. Profit = (P x Q) - [FC + (UVC x Q)].
     Thus, $38,000 = 16,000P - [$250,000 + ($30 x 16,000] = $48.

14-62 PRICING TO COVER COST PLUS PROFIT                                               APPLICATION

     The manager of a small gasoline station observes that while gasoline sales have been steady, the
     service side of the business has fallen off, and mechanics are often idle. He decides to offer a
     promotion—an oil change for $10 with a coupon mailed to 800 households in a 2-mile radius
     from his station. The $10 will just cover the costs of the oil change, and the cost of printing and
     mailing is $1000. He hopes the promotion will increase regular maintenance service calls,
     which average $40. (Materials and labor per job cost $30.) If two hundred customers used the
     coupon, what will be the total cost of the promotion? (Disregard any opportunity costs.)
     a. $200
     b. $800
     c. $1000
     d. $1200
     e. $1800 or more

     Answer: c Page: 372
     Rationale: If you don't consider opportunity costs, the promotion will cost $1000 (the cost of
     the coupon printing and mailing) regardless of the response.

14-63 TARGET RETURN-ON-SALES PRICING                                                    DEFINITION

     Target return-on-sales pricing is:
     a. adjusting the price of a product so it is "in line" with that of its largest competitor.
     b. setting the price of a line of products at a number of different price points.
     c. adding a fixed percentage to the cost of all items in a specific product class.
     d. setting prices to achieve a profit that is a specified percentage of the sales revenue.
     e. setting a price based on a specific annual dollar target profit volume.

     Answer: d Page: 372
     Rationale: Key term definition—target return-on-sales pricing




                                                819
14-64 TARGET RETURN-ON-SALES PRICING                                                APPLICATION

     A custom kitchen cabinet storeowner wishes to use target profit pricing to establish a price for a
     typical section of cabinets. Assume variable cost is $200 per unit, fixed cost is $44,000, and the
     storeowner desires a target profit of 20 percent of sales on an annual volume of 400 cabinets is
     desired. What price should be charged for a typical cabinet section?
     a. $372.00
     b. $311.00
     c. $445.50
     d. $395.75
     e. $387.50

     Answer: e Page: 372
     Rationale: Target return on sales = target profit / total revenue.
     TROS = P x Q - [FC + (UVC x Q)]/TR.
     0.20 = 400P - [$44,000 + ($200 x 400)]/400P, or $387.50.

14-65 TARGET RETURN-ON-INVESTMENT PRICING                                              DEFINITION

     Target return-on-investment pricing is:
     a. setting the price of a line of products at a number of different price points.
     b. adding a fixed percentage to the cost of all items in a specific product class.
     c. setting prices to achieve a profit that is a specified percentage of the sales volume.
     d. setting prices to achieve a specified percentage return-on-investment.
     e. setting a price based on an annual specific dollar target volume of profit.

     Answer: d Page: 372-373
     Rationale: Key term definition—target return-on-investment pricing

14-66 TARGET RETURN-ON-INVESTMENT PRICING                                           CONCEPTUAL

     Which of the following companies would be most likely to use target return-on-investment
     pricing?
     a. a public utility
     b. a florist shop
     c. a book publisher
     d. a veterinarian
     e. a farmer

     Answer: a Page: 372-373 Other Locations: SG
     Rationale: Target return-on-investment pricing is used by many utilities to satisfy reviews by
     public utility commissions to verify profits are reasonable, not exorbitant.




                                                820
14-67 CUSTOMARY PRICING                                                              DEFINITION

     Customary pricing is:
     a. a pricing method where the price the seller quotes includes all transportation costs.
     b. setting the same price for similar customers who buy the same product and quantities under
         the same conditions.
     c. deliberately selling a product below its list price to attract attention to it.
     d. a method of pricing a product based on tradition, standardized channel of distribution, or
         other competitive factors.
     e. pricing based on what the market will bear.

     Answer: d Page: 374
     Rationale: Key term definition—customary pricing

14-68 CUSTOMARY PRICING                                                              DEFINITION

     _____ is a competition-based method of pricing where tradition, a standardized channel of
     distribution, or other competitive factors dictate the price of a product.
     a. Standard markup pricing
     b. Cost-plus-percentage-of-cost pricing
     c. Customary pricing
     d. Experience curve pricing
     e. Target profit pricing

     Answer: c Page: 374
     Rationale: Key term definition—customary pricing

14-69 CUSTOMARY PRICING                                                            APPLICATION

     Consumers buy candy bars, snacks, and soda pop from vending machines. Traditionally, the
     price of each of these products is about 60 cents. If a marketer charges a significantly higher
     price for such products dispensed by vending machines, sales are likely to decline. In order to
     avoid such declines in sales, marketers tend to be very consistent in the price charged for
     vending machine products. This is an example of marketers employing a _____ strategy.
     a. below-market pricing
     b. skimming pricing
     c. penetration pricing
     d. customary pricing
     e. loss-leader pricing

     Answer: d Page: 374 Other Locations: W
     Rationale: For some products tradition, competitive factors, or a standardized distribution
     channel play a key role in the determination of product price. Vending machines are a prime
     example of a situation where customary pricing dictates the price charged for the product. As
     noted in the text, it may be more effective to change the quantity of the product rather than
     change the price of the product.




                                              821
14-70 CUSTOMARY PRICING                                                              CONCEPTUAL

     Vending machines are a good example of the application of what type of competition-based
     pricing?
     a. customary pricing
     b. above-,at-,or below-market pricing
     c. loss-leader pricing
     d. penetration pricing
     e. bundle pricing

     Answer: a Page: 374
     Rationale: Customary pricing is a method of pricing based on a product's tradition,
     standardized channel of distribution, or other competitive factors. This is the situation with
     vending machines.

14-71 CUSTOMARY PRICING                                                              APPLICATION

     Southern gardeners have a preconceived idea on what they will pay for pine bark mulch that
     they buy at their local gardening supply store to keep the weeds down in their gardens. If the
     price being charged is not within a narrow range that they feel is appropriate, they will make
     substitutions--newspaper, grass clippings or some other kind of ground covering. When pricing
     pine bark mulch, a garden supply retailer should use:
     a. customary pricing.
     b. above-,at-,or below market pricing.
     c. loss-leader pricing.
     d. penetration pricing.
     e. bundle pricing.

     Answer: a Page: 374
     Rationale: Customary pricing is a method of pricing based on a product's tradition,
     standardized channel of distribution, or other competitive factors.

14-72 ABOVE-MARKET PRICING                                                           APPLICATION

     A Swedish company such as Asko that prides itself on manufacturing and marketing some of
     the best-built and most expensive appliances in the world is using which competition-based
     method of pricing?
     a. customary pricing
     b. above-market pricing
     c. loss-leader pricing
     d. bait-and-switch pricing
     e. bundle pricing

     Answer: b Page: 374
     Rationale: Above-, at-, or below-market pricing is pricing based on what the market price is.
     Asko has decided to price its products far above the industry pricing "benchmark," an
     above-market pricing strategy.




                                               822
14-73 BELOW-MARKET PRICING                                                          APPLICATION

     An ad campaign by Suave shampoo asked television viewers to identify the hair that was
     shampooed and conditioned with Suave products and the hair on which expensive salon
     hair-care products were used. The idea of the ad was that a person could not tell by looking that
     a woman was using the much cheaper Suave brand. By making price its selling point, Suave is
     most likely using:
     a. demand backward pricing.
     b. below-market pricing.
     c. loss-leader pricing.
     d. prestige pricing.
     e. skimming pricing.

     Answer: b Page: 374 Other Locations: SG
     Rationale: The promotional campaign for Suave implies that its prices are significantly below
     those of equal products on the market, a below-market pricing strategy.

14-74 BELOW-MARKET PRICING                                                          CONCEPTUAL

     Manufacturers of generic products use which method of competition-based pricing?
     a. demand backward pricing
     b. below-market pricing
     c. loss-leader pricing
     d. prestige pricing
     e. skimming pricing

     Answer: b Page: 374
     Rationale: Above-, at-, or below-market pricing is pricing based on what the market price is.
     Manufacturers of generic products and retailers selling private brands often deliberately set
     prices between 8 and 10 percent lower than nationally branded competitive products, which is a
     below-market pricing strategy.

14-75 LOSS-LEADER PRICING                                                             DEFINITION

     Loss-leader pricing is:
     a. a pricing method where the price the seller quotes includes all transportation costs.
     b. setting the same price for similar customers who buy the same product and quantities under
         the same conditions.
     c. deliberately selling a product below its customary price to attract attention to it.
     d. a method of pricing based on a product's tradition, standardized channel of distribution, or
         other competitive factors.
     e. pricing based on intensity of customer demand.

     Answer: c Page: 374 Other Locations: W
     Rationale: Key term definition—loss-leader pricing




                                               823
14-76 LOSS-LEADER PRICING                                                           CONCEPTUAL

     Using _____, many retailers deliberately sell products below their normal prices (and
     sometimes below cost) to attract attention and induce additional store traffic.
     a. customary pricing
     b. above-market pricing
     c. loss-leader pricing
     d. prestige pricing
     e. skimming pricing

     Answer: c Page: 374
     Rationale: Loss-leader pricing is deliberately pricing a product below its customary price to
     attract consumer attention to it. It is hoped that customers will buy other, higher-margin
     products while in the store.

14-77 LOSS-LEADER PRICING                                                           APPLICATION

     When Pechin's, a legendary supermarket 50 miles south of Pittsburgh, prices rib steaks at $2.29
     a pound, which is below its cost, it is attempting not to sell steaks, but to:
     a. drive its competition out of business.
     b. attract customers in hopes they will buy other products as well.
     c. fill its parking lot so its store will look successful.
     d. help the local ranching community dispose of excess beef.
     e. circumvent fair trade rulings by the Federal Trade Commission (FTC).

     Answer: b Page: 374 Other Locations: W
     Rationale: When retailers use loss-leader pricing, their purpose is to attract customers in the
     hopes that they will buy other items in the store as well.

14-78 ONE-PRICE POLICY                                                              APPLICATION

     A radio advertisement features a female buyer who is very enthusiastic about the pricing
     policies of the Saturn automobile dealers. In the testimonial-type advertisement, the car buyer
     laments about the difficulty she experienced with other car dealers in haggling over a final price
     for an auto. In comparison, the buyer touts the ease with which she arrived at a final price for
     her new Saturn automobile--she simply entered the show room, asked for the price of the car she
     preferred, and the sales person quoted her the selling price. No matter which Saturn dealer she
     visited, the buyer (or any other buyer for that matter) would be quoted the same price for the
     same automobile. The advertisement represents Saturn's _____ policy.
     a. flexible-price
     b. standard-price
     c. fixed-price
     d. one-price
     e. sticker-price

     Answer: d Page: 375
     Rationale: The idea is simple: no matter which Saturn dealer a customer might visit, a given
     model of Saturn car is priced the same.




                                               824
14-79 ONE-PRICE POLICY                                                                 DEFINITION

     A _____ policy is the setting of the same price for similar customers who buy the same product
     and quantities under the same conditions.
     a. customary pricing
     b. one-price
     c. flexible-price
     d. standard markup
     e. blanket price

     Answer: b Page: 375
     Rationale: Key term definition—one-price policy

14-80 ONE-PRICE POLICY                                                               CONCEPTUAL

     When you buy a Wilson Sting tennis racket from a discount store, you are offered the product at
     a single price. You can buy it or not, but there is no variation in price under the seller's:
     a. penetration strategy.
     b. odd-even pricing.
     c. one-price policy.
     d. bundle-pricing policy.
     e. flexible-price policy.

     Answer: c Page: 375 Other Locations: SG
     Rationale: One-price policy, also called fixed pricing, is setting one price for all buyers of a
     product or service.

14-81 ONE-PRICE POLICY                                                                 DEFINITION

     What is fixed pricing?
     a. pricing for products that have a traditionally accepted price range
     b. another name for price lining
     c. another name for cost-plus fixed-fee pricing
     d. a type of demand-oriented pricing
     e. another name for a one-price policy

     Answer: e Page: 375
     Rationale: Key term definition—one-price policy




                                                825
14-82 FLEXIBLE-PRICE POLICY                                                           DEFINITION

     Offering the same product and quantities to similar customers but at different prices is called:
     a. price lining.
     b. customary pricing.
     c. a flexible-price policy.
     d. price fixing.
     e. discretionary pricing.

     Answer: c Page: 375
     Rationale: Key term definition—flexible-price policy

14-83 FLEXIBLE-PRICE POLICY                                                         CONCEPTUAL

     Which of the following statements about a flexible-price policy is true?
     a. When using a flexible-price policy, the seller may risk violating the Robinson-Patman Act.
     b. A flexible-price policy may be used when selling a house.
     c. This flexible-price policy may be used when selling a car.
     d. Flexible pricing may result in race and gender discrimination.
     e. All of the above statements about a flexible-price policy are true.

     Answer: e Page: 375
     Rationale: While a flexible-price policy may be used in selling products like houses or cars, it
     runs the risk of violating the Robinson-Patman Act or resulting in discrimination against the
     buyer.

14-84 FLEXIBLE-PRICE POLICY                                                           DEFINITION

     Yield management pricing is a form of:
     a. fixed-pricing
     b. loss-leader pricing.
     c. dynamic pricing,
     d. customary pricing.
     e. price lining.

     Answer: c Page: 375
     Rationale: Dynamic pricing is a synonym for a flexible-price policy.




                                               826
14-85 FLEXIBLE-PRICE POLICY                                                          APPLICATION

     When Teresa went into the furniture store to buy a new sleeper sofa, she thought the prices
     quoted by the salesperson were too high, so she prepared to leave. As she neared the door, the
     salesperson asked if she would be interested in buying the sofa if the price was $150 lower.
     Teresa returned to the store, purchased the sofa, and felt like she had gotten a good deal. The
     furniture store uses:
     a. price lining.
     b. customary pricing.
     c. a flexible-price policy.
     d. price fixing.
     e. discretionary pricing.

     Answer: c Page: 375
     Rationale: With a flexible-price policy, the furniture store could offer the sofa to similar
     customers but at different prices.

14-86 SETTING THE LIST PRICE                                                         APPLICATION

     Different brands within a company’s product line generally have different profit margins;
     higher price lines have higher profit margins. For example, Nike Variety tennis shoes have
     variable costs of $6 and sell for $24; whereas, Nike Wimbleton tennis shoes have variable costs
     of $10 and sell for $48. It must be true that:
     a. demand is unrelated to price.
     b. Nike is using a cost-plus percentage-of-cost pricing strategy.
     c. Nike is using a price lining strategy.
     d. demand is unrelated to product quality.
     e. consumers do not use price as an indication of quality.

     Answer: c Page: 375 Other Locations: SG
     Rationale: Nike is using a price lining strategy. It is not using b because the percentages of
     markups are different. The other answers do not follow from the example.

14-87 ETHICS AND SOCIAL RESPONSIBILITY ALERT                                         CONCEPTUAL

     Which of the following statements about how a new car is purchased in the United States is
     true?
     a. Car dealers offer male and female African-Americans and white females higher prices than
         white males.
     b. A shortcoming of how flexible pricing is used in car sales is the potential for price
         discrimination by race and gender.
     c. New car price bargaining has been eliminated by most car dealers.
     d. Sixty percent of car buyers dread price negotiations when looking for a new car.
     e. All of the above statements about how a new car is purchased in the United States are true.

     Answer: e Page: 376
     Rationale: The Ethics and Social Responsibility Alert cites all these examples as possible
     abuses of a flexible-price policy.




                                               827
14-88 PRODUCT LINE PRICING                                                              DEFINITION

     When a manager sets prices for all items in a multiple products line to cover the total cost and to
     produce a profit for the complete line—not necessarily for each item, it is called:
     a. line item pricing.
     b. product line pricing.
     c. price lining.
     d. customary pricing.
     e. discretionary pricing.

     Answer: b Page: 376
     Rationale: Key term definition—product line pricing

14-89 PRODUCT-LINE PRICING                                                           APPLICATION

     Leupold & Stevens, Inc., a U.S. manufacturer of rifle scopes, uses a variety of pricing strategies
     for its rifle scopes. For some, the company uses above-, at-, or below-market pricing to reach as
     many customers as possible. The company is more concerned about making a profit for the
     complete line of its scopes—rather than making a profit on just one item in its product. Leupold
     & Stevens uses:
     a. line item pricing.
     b. product line pricing.
     c. price lining.
     d. customary pricing.
     e. discretionary pricing.

     Answer: b Page: 375 Other Locations: W
     Rationale: When a manager sets prices for all items in a multiple products line to cover the total
     cost and to produce a profit for the complete line--not necessarily for each item, it is called
     product-line pricing.




                                                828
14-90 CUSTOMER EFFECTS ON PRICING DECISION                                            APPLICATION

     The Hummer was an attention-getting SUV that sold for $80,000 in a limited number of outlets.
     Then, General Motors proved the smaller version for $50,000 could be sold in many more
     outlets. To cover costs and reach the market faster, the Hummer 2 shared some parts with other
     GM cars. To which customer effects did Hummer marketing managers need to pay particular
     attention?
     a. The original Hummer is prestige priced; therefore, the price of Hummer 2 should make
          sense to customers and reflect differences in the perceived value of the products offered.
     b. High gas mileage will be important for Hummer 2.
     c. Color choices will be important for Hummer 2.
     d. Comfort and space for families will be important for Hummer 2.
     e. The original Hummer was penetration priced, so that the Hummer 2 continues this pricing
          strategy to maximize expected profit.

     Answer: a Page: 377
     Rationale: The challenge will be to deliver a Hummer for a lower price that will not lead
     customers to become dubious about quality and prestige and buy fewer vehicles. In this market,
     at either price point, customers are not buying the vehicle for its gas mileage or color or as
     family transport. Clearly, the original was not penetration (low) priced.

14-91 CUSTOMER EFFECTS OF A PRICING DECISION CHANGE                                   APPLICATION

     Toro decided to augment its traditional hardware outlet distribution by also selling through big
     discounters such as Wal-Mart and Target and set prices for the discounters substantially below
     those for its traditional hardware outlets. Many unhappy hardware stores subsequently
     abandoned Toro products in favor of other manufacturers. This is an example of a firm failing
     to consider _____ effects when setting its final list or quoted price.
     a. company
     b. social responsibility
     c. backlash
     d. competitive
     e. customer

     Answer: e Page: 377
     Rationale: In setting its prices, Toro failed to weigh the customer effects of its pricing decisions
     and consider the factors that satisfy the perceptions or expectations of its customers. By failing
     to consider how its traditional hardware outlet customers would view the lower prices offered
     the discounters, Toro lost many of these hardware store (customer) outlets.




                                                829
14-92 INCREMENTAL COSTS AND REVENUES                                                 CONCEPTUAL

     What is the main difficulty involved in performing a marginal analysis of the incremental costs
     and revenues that could result from a new advertising campaign?
     a. measuring the extra fixed cost involved
     b. measuring the extra variable cost involved
     c. measuring the incremental revenue generated by the change
     d. measuring the incremental cost incurred by the change
     e. all of the above

     Answer: c Page: 378
     Rationale: A firm can measure the incremental cost of a new advertising campaign quite easily
     because the costs figures are readily available. It is difficult, however, to measure the
     incremental revenue generated by the advertising campaign.

14-93 INCREMENTAL COSTS AND REVENUES                                                 APPLICATION

     A small gasoline station manager observes that while gasoline sales have been steady, the
     service side of her business has fallen off and mechanics are often idle. She decides to offer a
     promotion--an oil change for $10 with a coupon mailed to 800 households in a 2-mile radius
     from her station. The $10 will just cover the costs of the oil change, and the cost of printing and
     mailing is $1000. She hopes the promotion will increase regular maintenance service calls,
     whose average price is $40 (Average materials and labor costs per job is $30.) How many
     additional maintenance service jobs must result for the promotion to break even? (Disregard
     opportunity costs, goodwill effects, and any additional revenues.)
     a. 70 maintenance jobs
     b. 80 maintenance jobs
     c. 100 maintenance jobs
     d. 300 maintenance jobs
     e. 400 maintenance jobs

     Answer: c Page: 378 Other Locations: SG
     Rationale: Incremental No. of Jobs = Extra Fixed Cost / Price - UVC = 1000 / 40 - 30 = 100
     maintenance jobs

14-94 TYPES OF DISCOUNTS                                                                DEFINITION

     Four types of price discounts are:
     a. quantity, trade-in, promotional, and cash.
     b. seasonal, functional, cash, and quantity.
     c. quantity, seasonal, promotional, and cash.
     d. cash, trade-in, seasonal, and promotional.
     e. trade-in, promotional, geographic, and functional.

     Answer: b Page: 379
     Rationale: These are identified in the text as the four kinds of especially important discounts.




                                                830
14-95 QUANTITY DISCOUNTS                                                             DEFINITION

     Reductions in unit cost for placing a larger order are:
     a. promotional allowances.
     b. quantity discounts.
     c. one-price policy prices.
     d. penetration prices.
     e. size of order allowances.

     Answer: b Page: 379
     Rationale: Key term definition—quantity discounts

14-96 QUANTITY DISCOUNTS                                                           CONCEPTUAL

     Your local instant photocopying service charges 10 cents a copy for copies up to a quantity of
     25, 9 cents a copy for 26 to 100, and 8 cents a copy for 101 or more. What kind of adjustment to
     list or quoted prices is the photocopying service using?
     a. bundle pricing
     b. quantity discounts
     c. loss-leader pricing
     d. promotional discounts
     e. everyday low pricing

     Answer: b Page: 379
     Rationale: The case provides an example of quantity discounts.

14-97 QUANTITY DISCOUNTS                                                           APPLICATION

     If you buy one pair of Uvex Clear UVExtreme safety eyewear, the cost is $7.40, but if you buy
     ten at one time, the price per pair is reduced to $6.85. This is an example of a:
     a. promotional allowance.
     b. cumulative quantity discount.
     c. bundle pricing.
     d. functional discount.
     e. noncumulative quantity discount.

     Answer: e Page: 379
     Rationale: A noncumulative quantity discount is based on the size of an individual purchase
     order, the situation here.




                                                831
14-98 QUANTITY DISCOUNTS                                                              DEFINITION

     A _____ applies to the accumulation of purchases of a product over a given time period,
     typically a year.
     a. promotional allowance
     b. cumulative quantity discount
     c. cash discount
     d. functional discount
     e. noncumulative quantity discount

     Answer: b Page: 379
     Rationale: Key term definition—cumulative quantity discounts

14-99 QUANTITY DISCOUNTS                                                            APPLICATION

     Mike Morgan, a sales representative for a major distributor of Kodak film, wanted to encourage
     repeat purchases by his customers. In order to accomplish this objective, Morgan offered the
     following discount to his customers:

     10-50 cases of film over the next 12 months—a 10 percent discount,
     51-100 cases of film over the next 12 months—a 12 percent discount,
     101-200 cases of film over the next 12 months—a 15 percent discount.

     What type of discount was Morgan offering his customers?
     a. a seasonal discount
     b. a cumulative quantity discount
     c. a noncumulative quantity discount
     d. a trade discount
     e. a noncumulative trade discount

     Answer: b Page: 379
     Rationale: Cumulative quantity discounts are typically used to encourage customers to engage
     in repeat purchase behavior. In essence, the more product a customer purchases during a given
     and specified period of time, the greater the price discount that customer receives. This is what
     Mike Morgan offered his customers.




                                               832
14-100 SEASONAL DISCOUNT                                                            CONCEPTUAL

     Manufacturers use seasonal discounts to:
     a. entice dealers to purchase seasonal merchandise earlier in the selling season.
     b. rid themselves of dated merchandise.
     c. prolong the peak seasonal selling season.
     d. "load up" their dealers.
     e. show consumers holiday goodwill.

     Answer: a Page: 379-380
     Rationale: Seasonal discounts encourage the buyer to stock inventory earlier than normal
     demand would require. This enables the manufacturer to reduce seasonal peaks and troughs in
     production.

14-101 SEASONAL DISCOUNT                                                            CONCEPTUAL

     To encourage buyers to stock inventory earlier than their normal demand would require,
     manufacturers often use:
     a. noncumulative discounts.
     b. cumulative discounts.
     c. seasonal discounts.
     d. trade discounts.
     e. functional discounts.

     Answer: c Page: 379-380
     Rationale: Discounts are reductions from list price that a seller gives a buyer as a reward for
     some activity of the buyer that is favorable to the seller. Seasonal discounts encourage buyers to
     stock inventory earlier than their normal demand would require.

14-102 SEASONAL DISCOUNT                                                            APPLICATION

     When purchasing which one of the following products would you be likely to receive a seasonal
     discount?
     a. an engraved silver picture frame
     b. a ream of computer printer paper
     c. a mystery novel
     d. a can of Italian-cut green beans
     e. none of the above

     Answer: e Page: 379-380
     Rationale: Seasonal discounts are given on products like Christmas decorations, swimsuits,
     and wood burning stoves that have seasonal spikes in demand. The products listed would not
     have a primary selling season.




                                               833
14-103 TRADE DISCOUNT                                                                  DEFINITION

     When calculating trade (functional) discounts, the first number in the sequence always refers to
     the:
     a. the discount to the ultimate consumer.
     b. the manufacturer's percentage cost.
     c. the retail end of the channel.
     d. the channel intermediary closest to the manufacturer.
     e. SKU.

     Answer: c Page: 380
     Rationale: This is the pricing convention used in today’s businesses.

14-104 TRADE DISCOUNT                                                               APPLICATION

     A manufacturer does marketing research and estimates that consumers will accept a price of $50
     for a jacket. If the manufacturer expects to offer trade discounts of 40, 10, 5 to retailers,
     wholesalers, and agents, what price will the manufacturer receive for the jacket?
     a. $45
     b. $27.50
     c. $25.65
     d. $22.50
     e. $10.05

     Answer: c Page: 380-381 Other Locations: SG
     Rationale: $50 x .6 x .9 x .95 = $25.65

14-105 TRADE DISCOUNT                                                               APPLICATION

     A manufacturer estimates that consumers will accept a price of $75 for a handbag. If the
     manufacturer expects to offer trade discounts of 35, 15, 5 to retailers, wholesalers, and agents,
     what price will the manufacturer receive for the handbag?
     a. $26.25
     b. $33.75
     c. $39.37
     d. $41.25
     e. $63.25

     Answer: c Page: 380 Other Locations: W
     Rationale: $75 x .65 x .85 x .95 = $39.37




                                               834
14-106 TRADE DISCOUNT                                                                APPLICATION

     What would be the ultimate selling price of a sweater be if the cost to the manufacturer is $11.75
     and the manufacturer, wholesaler, and retailer (no other members of the channel) took markups
     on selling price of 10 percent, 25 percent, and 40 percent respectively?
     a. $22.62
     b. $14.68
     c. $16.45
     d. $20.57
     e. $29.01

     Answer: e Page: 380
     Rationale: $11.75 / (.9 x .75 x .6) = $29.01

14-107 TRADE DISCOUNT                                                                APPLICATION

     Within the channel of distribution for certain types of imported furniture, the typical trade terms
     are 40/15/10. If a dining room table has a list price of $1000, how much would the manufacturer
     sell the table to a jobber for?
     a. $459.00
     b. $400.00
     c. $390.00
     d. $350.00
     e. $300.00

     Answer: a Page: 380
     Rationale: The manufacturer would realize $459.00, calculated as follows:
     $1000 less 40 percent of $1000 = $600 is the amount the retailer pays the wholesaler.
     $600 less 15 percent of $600 = $510 is the amount the wholesaler pays the jobber.
     $510 less 10 percent of $510 = $459 is the amount the jobber pays the manufacturer.

14-108 TRADE DISCOUNT                                                                APPLICATION

     What would be the ultimate selling price of a pair of shoes if the cost to the manufacturer is
     $15.20 and the manufacturer, wholesaler, and retailer (no other members of the channel) took
     markups on selling price of 25 percent, 10 percent, and 50 percent?
     a. $23.75
     b. $26.60
     c. $27.36
     d. $33.75
     e. $45.04

     Answer: e Page: 380 Other Locations: W
     Rationale: $15.20/.75 x .9 x .5 = $45.04




                                                835
14-109 CASH DISCOUNT                                                                   DEFINITION

     To encourage retailers to pay their bills quickly, manufacturers offer them:
     a. quantity discounts.
     b. flexible pricing policies.
     c. promotional allowances.
     d. cash discounts.
     e. manufacturers' inducements.

     Answer: d Page: 380-381
     Rationale: Key term definition—cash discounts

14-110 CASH DISCOUNT                                                                APPLICATION

     If an invoice for $45,000 is billed 2/10 net 30, what is the highest annual interest rate that one
     would rationally pay to borrow money in order to take advantage of the cash discount if the only
     consideration is a lower annual interest rate than charged on the invoice?
     a. 71.9 percent
     b. 9.9 percent
     c. 17.9 percent
     d. 23.9 percent
     e. 35.9 percent

     Answer: e Page: 380-381
     Rationale: 2 percent for 20 days is an annual rate of 36 percent. So the highest annual interest
     rate below 36 percent is possible, 35.9 percent here.

14-111 CASH DISCOUNT                                                                APPLICATION

     Rick's Bike Shop allows customers to use a credit card for purchases. The shop pays 3 percent of
     the sale to the credit card company. To promote more business, Rick decides to offer a lower
     price to customers paying cash--that price being 3 percent less than the standard list price. Rick
     is giving his customers a(n):
     a. functional discount.
     b. trade-in allowance.
     c. promotional allowance.
     d. discount-for-cash.
     e. everyday low price.

     Answer: d Page: 380-381 Other Locations: SG
     Rationale: Rick is providing a cash discount to customers equal to the cost of credit. This
     discount takes the form of a discount-for-cash policy.




                                               836
14-112 CASH DISCOUNT                                                                   APPLICATION

     When Sherman bought gas, he noticed the convenience store offered him a 3 percent reduction
     in price if he paid cash rather than used his credit card. The convenience store was offering him
     a:
     a. trade discount.
     b. cash discount.
     c. promotional allowance.
     d. rebate.
     e. functional discount.

     Answer: b Page: 381
     Rationale: Retailers provide cash discounts to customers to eliminate the cost of credit granted
     to consumers.

14-113 TRADE-IN ALLOWANCE                                                              APPLICATION

     A new car dealer can offer a substantial reduction in the list price of a new Ford pickup truck by
     offering you a _____ of $3,000 for your 1988 Camaro.
     a. cash discount
     b. functional discount
     c. seasonal discount
     d. trade-in allowance
     e. promotional allowance

     Answer: d Page: 381
     Rationale: This is a description of a situation involving a trade-in allowance.

14-114 PROMOTIONAL ALLOWANCE                                                            DEFINITION

     The cash payment or extra amount of "free goods" awarded sellers in the channel of distribution
     for undertaking certain advertising or selling activities to promote the product is a:
     a. quantity discount.
     b. flexible pricing policy.
     c. promotional allowance.
     d. payoff.
     e. manufacturer's inducement.

     Answer: c Page: 381
     Rationale: Key term definition—promotional allowances




                                               837
14-115 EVERYDAY LOW PRICING                                                         DEFINITION

     The practice of replacing promotional allowances with lower manufacturer list prices is called:
     a. everyday low pricing.
     b. FOB origin pricing.
     c. trade-in allowances.
     d. single-zone pricing.
     e. basing-point pricing.

     Answer: a Page: 381
     Rationale: Key term definition—everyday low pricing

14-116 MARKETING NEWSNET                                                          CONCEPTUAL

     Which of the following statements about everyday low pricing (EDLP) is true?
     a. EDLP encourages manufacturer allowances.
     b. Supermarkets have hailed EDLP as value pricing at its most effective.
     c. Some argue that EDLP without price specials is boring for many grocery shoppers.
     d. EDLP allows supermarkets to use deeply discounted price specials.
     e. EDLP can increase average retail prices by as much as 10 percent.

     Answer: c Page: 382
     Rationale: EDLP eliminated manufacturer allowances. EDLP does not allow supermarkets to
     use deeply discounted price specials--Hi-Lo pricing. Manufacturers refer to EDLP as value
     pricing, and supermarkets call it day low profits. EDLP can reduce average retail prices by as
     much as 10 percent.

14-117 MARKETING NEWSNET                                                          CONCEPTUAL

     In preference to everyday low prices (EDLP), supermarkets prefer _____ based on frequent
     specials where prices are temporarily lowered, then raised again.
     a. odd-even pricing
     b. a one-price policy
     c. Hi-Lo pricing
     d. bundle-pricing
     e. rigid-pricing.

     Answer: c Page: 382
     Rationale: The Marketing NewsNet describes how supermarkets prefer Hi-Lo pricing based on
     frequent specials that they believe enables them to have higher profits than with EDLP.




                                              838
14-118 GEOGRAPHICAL ADJUSTMENTS                                                      CONCEPTUAL

     Which of the following statements about geographical adjustments to price is correct?
     a. In FOB origin pricing, the seller selects the mode of transportation.
     b. In FOB with freight allowed pricing, the seller adds the transportation costs to the list price.
     c. Multiple-zone pricing is sometimes referred to as "postage-stamp" pricing.
     d. Basing point pricing seems to have been used in industries where freight expenses are a
        significant part of the total cost to the buyer.
     e. All of the above statements about geographical adjustments to price are correct.

     Answer: d Page: 382 Other Locations: SG
     Rationale: Basing point pricing methods have been used in the cement, and lumber industries
     where freight expenses are a significant part of the total cost to the buyer and products are
     largely undifferentiated.

14-119 GEOGRAPHICAL ADJUSTMENTS                                                      CONCEPTUAL

     Geographic adjustments are made by manufacturers or wholesalers to cover:
     a. production costs.
     b. administrative costs.
     c. promotional costs.
     d. variable costs.
     e. none of the above.

     Answer: e Page: 382
     Rationale: Geographic adjustments are made by manufacturers or wholesalers to list or quoted
     prices to reflect the cost of transportation of the products from seller to buyer.

14-120 FOB ORIGIN PRICING                                                               DEFINITION

     FOB origin pricing is a method of pricing where:
     a. title of goods remains with the manufacturer until sold to the ultimate consumer.
     b. title of goods passes to the buyer upon arrival at the final destination.
     c. title of goods passes to the buyer at the point of loading.
     d. price the seller sets includes all transportation costs.
     e. title of goods passes to the buyer when the state boundary is crossed.

     Answer: c Page: 382
     Rationale: Key term definition—FOB origin pricing




                                                839
14-121 FOB ORIGIN PRICING                                                             APPLICATION

     Central Ice Machine Company is located in Omaha, Nebraska, sells Frick, Sullair, York, and
     Fes Fuller ammonia refrigeration parts. The company ships using FOB origin pricing. Which
     of the following statements about the shipment of a Frick reciprocating compressor is true?
     a. All buyers will pay no shipping costs because they are paid by Central Ice Machine.
     b. Central Ice Machine pays the same amount as the buyer no matter where the compressor is
          shipped.
     c. It will cost Central Ice Machine more to ship to Charlotte, North Carolina than to Topeka,
          Kansas.
     d. A buyer in Albany, New York, will pay significantly more shipping charges than a buyer in
          Lincoln, Nebraska, and Central Ice Machine will pay none.
     e. All buyers will pay the same shipping costs, and Central Ice Machine will pay none.

     Answer: d Page: 382
     Rationale: With FOB origin pricing, Central Ice Machine will not be paying shipping costs.

14-122 FOB ORIGIN PRICING                                                                DEFINITION

     When buyers and sellers are separated by vast distances, geographical adjustments may be made
     to reflect the cost of transportation of the products from sellers to buyers. Which method of
     quoting prices would be chosen by a seller who wants to maximize profits?
     a. uniform delivered pricing
     b. single-zone pricing
     c. multiple-zone pricing
     d. FOB origin pricing
     e. FOB buyer's location

     Answer: d Page: 382
     Rationale: The seller pays the cost of loading the product onto the vehicle, usually at the seller's
     factory or warehouse. The title passes to the buyer at the point of loading, so the buyer is
     responsible for all freight costs. Thus, the seller has maximized profit, with no added costs for
     freight--and no geographical adjustments. However, a competitor may offer some kind form of
     delivered pricing method, so the seller may need to adjust this policy.




                                                840
14-123 FOB ORIGIN PRICING                                                            CONCEPTUAL

     The fashion buyer for Neiman Marcus is in Italy to view the new collections and to order for the
     coming season. In Milan, she negotiates a good price for a quantity of shoes in a range of sizes
     and styles, FOB factory. This means that:
     a. the factory selects the mode of transportation, pays freight charges, and is responsible for
         any damage because the seller retains title to the goods until they are delivered to Neiman
         Marcus.
     b. Neiman Marcus selects the mode of transportation, pays freight charges, and is responsible
         for any damage while the shoes are in transit because title passed to the buyer at the point of
         loading.
     c. Neiman Marcus and the factory split freight costs.
     d. the factory pays freight to the U.S., Neiman Marcus pays freight within the U.S.
     e. the factory passes the title when the goods are loaded, but will pay all shipping costs.

     Answer: b Page: 382
     Rationale: With FOB factory (FOB origin pricing) the title to the goods passes to the buyer at
     the point of loading, so Neiman Marcus becomes responsible for picking the specific mode of
     transportation, for all the transportation costs, and for subsequent handling of the shoes.

14-124 UNIFORM DELIVERED PRICING                                                     CONCEPTUAL

     Which of the following is NOT a uniform delivered pricing method?
     a. single-zone pricing
     b. FOB with freight allowed pricing
     c. freight absorption pricing
     d. multiple-zone pricing
     e. FOB destination pricing

     Answer: e Page: 382
     Rationale: All of the examples, except e are forms of uniform delivered pricing.

14-125 UNIFORM DELIVERED PRICING                                                        DEFINITION

     Uniform delivered pricing means:
     a. title of goods remains with the manufacturer until sold to the ultimate consumer.
     b. pricing and title of goods passes to the buyer upon arrival at final destination.
     c. title of the goods passes to the buyer at the point of shipment.
     d. the price the seller sets includes all transportation costs.
     e. title of goods passes to the buyer when the state boundary is crossed.

     Answer: d Page: 382 Other Locations: SG
     Rationale: Key term definition—uniform delivered pricing




                                                841
14-126 UNIFORM DELIVERED PRICING                                                    CONCEPTUAL

     Many cruise lines pay the customer's airfare to the point of cruise departure. What type of price
     adjustment are the cruise lines using?
     a. skimming pricing
     b. promotional pricing
     c. quantity discount pricing
     d. uniform delivered pricing
     e. prestige pricing

     Answer: d Page: 382 Other Locations: SG
     Rationale: Uniform delivered pricing is a method of pricing where the price the seller quotes
     includes all transportation costs.

14-127 SINGLE-ZONE PRICING                                                          APPLICATION

     A company placing an order from the Lab Safety Supply catalog is instructed to add 6 percent of
     the total cost of the order to pay shipping. Which method of shipping does this catalog supplier
     use?
     a. single-zone pricing
     b. flexible-price pricing
     c. FOB origin pricing
     d. uniform delivered pricing
     e. basing-point pricing

     Answer: a Page: 383
     Rationale: Single-zone pricing (also called postage stamp pricing) means that every buyer pays
     the same delivered price for the products.

14-128 MULTIPLE-ZONE PRICING                                                        CONCEPTUAL

     After extensive analysis, a mail order company has decided to embark on a policy of multiple
     zone pricing. In which step of the price-setting process would the mail order firm have made
     this decision?
     a. Make special adjustments to the list or quoted price.
     b. Select an approximate price level.
     c. Estimate demand and revenue.
     d. Identify price constraints and objectives.
     e. Set list or quoted price.

     Answer: a Page: 382-383
     Rationale: This decision is part of step 6 of the price-setting process: Make special adjustments
     to the list or quoted price.




                                               842
14-129 MULTIPLE-ZONE PRICING                                                         APPLICATION

     A company in Virginia that manufactures and sells peanut brittle to retailers charges higher
     shipping costs for orders sent to customers living west of the Mississippi River. This Virginia
     company is using:
     a. single-zone pricing.
     b. multiple-zone pricing.
     c. FOB origin pricing.
     d. uniform delivered pricing.
     e. basing-point pricing.

     Answer: b Page: 383
     Rationale: In multiple-zone pricing, a firm divides its selling territories into geographic areas.

14-130 FOB WITH FREIGHT-ALLOWED PRICING                                                DEFINITION

     Another name for freight-absorption pricing is:
     a. FOB factory.
     b. postage stamp pricing.
     c. FOB with freight-allowed pricing.
     d. basing point pricing.
     e. FOB origin pricing.

     Answer: c Page: 383
     Rationale: Text term definition—FOB with freight-allowed pricing

14-131 FOB WITH FREIGHT-ALLOWED PRICING                                                DEFINITION

     With _____, the buyer is allowed to deduct freight expenses from the list price of the goods.
     The seller pays the transportation costs.
     a. FOB factory
     b. basing-point pricing
     c. postage stamp pricing
     d. FOB origin pricing
     e. FOB with freight-allowed pricing

     Answer: c Page: 383
     Rationale: Text term definition—FOB with freight-allowed pricing




                                                843
14-132 BASING-POINT PRICING                                                        APPLICATION

     For which of the following products is its manufacturer or producer most likely to use
     basing-point pricing?
     a. pet food
     b. furniture
     c. crystal glass bowls
     d. cut flowers
     e. coal

     Answer: e Page: 383 Other Locations: SG
     Rationale: Basing-point pricing is commonly used in industries where freight expenses are a
     significant part of the total cost to the buyer, and the products are largely undifferentiated.

14-133 BASING-POINT PRICING                                                           DEFINITION

     _____ involves selecting one or more geographical locations from which the list price for
     products plus freight expenses are changed to the buyer.
     a. FOB origin pricing
     b. Uniform delivered pricing
     c. Basing-point pricing
     d. Multiple-zone pricing
     e. Postage stamp pricing

     Answer: c Page: 383
     Rationale: Key term definition—basing-point pricing

14-134 LEGAL AND REGULATORY ASPECTS OF PRICING                                     CONCEPTUAL

     Which of the following statements about the legal and regulatory aspect of pricing is true?
     a. The Robinson-Patman Act deals with predatory pricing.
     b. The Consumer Goods Pricing Act is the only federal legislation that deals directly with
        pricing issues.
     c. The Sherman Act deals only with vertical price fixing.
     d. The Federal Trade Commission Act deals with predatory pricing, deceptive pricing, and
        geographical pricing issues.
     e. The Consumer Goods Pricing Act and the Robinson-Patman Act deal with price
        discrimination.

     Answer: d Page: 383
     Rationale: Predatory pricing is regulated by the Federal Trade Commission Act and the
     Sherman Act. In addition to the Consumer Goods Pricing Act, there is the Federal Trade
     Commission Act, the Robinson-Patman Act, and the Sherman Act. The Consumer Goods
     Pricing Act deals with vertical price fixing--not the Sherman Act. Only the Robinson-Patman
     Act deals with price discrimination. See also Figure 14-8.




                                               844
14-135 PRICE FIXING                                                                    DEFINITION

      Conspiracy among firms to set prices for a product is:
      a. price discrimination.
      b. price fixing.
      c. predatory pricing.
      d. tying arrangements.
      e. exclusive dealing.

      Answer: b Page: 383
      Rationale: Key term definition—price fixing

14-136 PRICE FIXING                                                                    DEFINITION

      Price fixing is:
      a. an arrangement a manufacturer makes with a reseller to handle only its products and not
          those of a competitor.
      b. the practice of charging a very low price for a product with the intent of driving competitors
          out of business.
      c. the practice of charging different prices to different buyers for goods of like grade and
          quality.
      d. a conspiracy among firms to set prices for a product.
      e. a seller's requirement that the purchaser of one product also buy another product in the line.

      Answer: d Page: 363
      Rationale: Key term definition—price fixing

14-137 PRICE FIXING                                                                  CONCEPTUAL

      “The customer is our enemy; the competitor is our friend.” That's the unofficial world-view of
      $11-billion-in-sales Archer Daniels Midland (ADM), according to FBI mole-executive Mark
      Whitacre in an interview. Given this information, which of the following illegal pricing
      practices would ADM have been most likely to engage in?
      a. price fixing
      b. dynamic pricing
      c. price differentiation
      d. FOB origin pricing
      e. cost justification defense

      Answer: a Page: 383-384 Other Locations: W
      Rationale: Price fixing is a conspiracy among firms to set prices for a product. Alternatives B,
      C, D, and E are not illegal.




                                                845
14-138 WEB LINK                                                                         CONCEPTUAL

      According to the text, the Federal Trade Commission (FTC) is especially concerned about the:
      a. overuse of FOB origin pricing.
      b. misuse of quantity discounting.
      c. elimination of seasonal discounts.
      d. widespread use of fixed pricing.
      e. misuse of the word “free” in promotions.

      Answer: e Page: 384
      Rationale: The Web Link points out that advertisers must take extreme care in using the word,
      “free” in their promotions.

14-139 PRICE-FIXING                                                                     APPLICATION

      Mark Johnson, the manager of a discount consumer electronics store, has been approached by
      the manufacturer of a popular and profitable line of compact disk storage racks regarding the
      retail price charged for the racks at Johnson's store. The manufacturer's representative has
      implied that if Johnson doesn't raise the retail prices for the storage racks to those charged by the
      manufacturer's non-discount customers, Johnson's supply of racks may be severely curtailed.
      The manufacturer is guilty of attempting:
      a. horizontal price-fixing.
      b. resale price maintenance.
      c. price discrimination.
      d. predatory pricing.
      e. bait and switch pricing.

      Answer: b Page: 384 Other Locations: SG
      Rationale: Resale price maintenance (also called vertical price fixing), illegal since 1975,
      involves controlling agreements between independent buyers and sellers whereby sellers are
      required not to sell products below a minimum retail price.

14-140 PRICE DISCRIMINATION                                                             APPLICATION

      In one of its least favorite actions, Amazon.com was caught fiddling with its price tags. Avid
      videodisc shoppers found that the online store was offering different customers different prices
      for the same DVD, and complained vociferously. Amazon was caught red-handed. It was,
      company officials admitted, trying to see how much it could charge for an item before shoppers
      balked. No matter what the reasoning behind it, Amazon.com was using:
      a. horizontal price-fixing.
      b. resale price maintenance.
      c. price discrimination.
      d. predatory pricing.
      e. bait and switch pricing.

      Answer: c Page: 384
      Rationale: Price discrimination the practice of charging different prices to different buyers for
      goods of like grade and quality.




                                                  846
14-141 PRICE DISCRIMINATION                                                               DEFINITION

     Price discrimination is:
     a. an arrangement a manufacturer makes with a reseller to handle only its products and not
         those of a competitor.
     b. the practice of charging a very low price for a product with the intent of driving competitors
         out of business.
     c. the practice of charging different prices to different buyers for goods of like grade and
         quality.
     d. a conspiracy among firms to set prices for a product or service.
     e. a seller's requirement that the purchaser of one product also buy another product in the line.

     Answer: c Page: 384-385
     Rationale: Key term definition—price discrimination

14-142 ROBINSON-PATMAN ACT                                                            CONCEPTUAL

     Which of the following statements about the Robinson-Patman Act is true?
     a. The Robinson-Patman deals with price discrimination.
     b. The Robinson-Patman contains provisions dealing with promotional allowances.
     c. The Robinson-Patman allows price differentials to different customers under certain
        changing market conditions.
     d. The Robinson-Patman allows sellers to "meet the competition."
     e. All of the above statements about the Robinson-Patman Act are true.

     Answer: e Page: 384
     Rationale: As explained in the text, all of the first four statements are correct.

14-143 DECEPTIVE PRICING                                                              APPLICATION

     A hardware store advertises a 3/8" Black and Decker Power Drill for $29.95. You enter the
     store intending to purchase the drill. The salesperson informs you that they are all sold out. She
     tells you that the "sale" drills were factory seconds and that if you are going to be doing any kind
     of serious woodworking, you should buy the Model 3309, which sells for $49.99. This scenario
     has elements of which type of deceptive pricing?
     a. comparable value comparisons
     b. former price comparisons
     c. comparisons with suggested prices
     d. conditional bargains
     e. bait and switch

     Answer: e Page: 385
     Rationale: This scenario has all the elements of bait and switch. The store offers a product at a
     low price, is out of stock on the product, the salesperson tells you that the sale item was of
     inferior quality, and attempts to get you to buy a higher-priced model. See also Figure 14-9.




                                                847
14-144 DECEPTIVE PRICING                                                              APPLICATION

     Brake-O is a franchise company that repairs brakes in cars and trucks. A radio ad for the
     company warned potential customers to “not fall prey to bait-and-switch schemes.” The ad was
     telling potential customers to:
     a. report services that violate the Robinson-Patman Act.
     b. be wary of brake repair services that are priced low because the services may try to sell
          customers a much higher priced service once the customer enters the store.
     c. avoid doing businesses with services that have initiated a conspiracy among firms in its
          industry to set prices for a product or service.
     d. not do business at services that have arranged with a particular manufacturer that they will
          only buy from this manufacturer and from no other.
     e. avoid doing business with monopolistic competitors who are trying to start a price war.

     Answer: b Page: 385
     Rationale: With a bait-and-switch scheme, the store offers a product at a low price, is out of
     stock on the product, the salesperson tells the customer that the sale item was of inferior quality,
     and attempts to get him or her to buy a higher-priced model.

14-145 DECEPTIVE PRICING                                                              APPLICATION

     To promote their business, some psychics advertise free tarot-card readings and other insights
     into their customers' futures on television. Unfortunately, this “free reading” has cost some
     unsuspecting callers as much as $700 in phone charges. This sort of deceptive pricing practice
     would be monitored by the:
     a. Consumer Protection Agency.
     b. U.S. Department of Justice.
     c. Federal Trade Commission.
     d. Federal Communications Commission.
     e. Telecommunications Commission.

     Answer: c Page: 385
     Rationale: See also the Web Link in this chapter, which further discusses the misuse of the
     term, “free,” which is overseen by the Federal Trade Commission.




                                                848
14-146 GEOGRAPHICAL PRICING                                                        CONCEPTUAL

     Which of the following statements about geographical pricing is true?
     a. Geographical pricing is one type of pricing that has never fallen under the scrutiny of the
        U.S. legal system.
     b. FOB origin pricing is legal.
     c. Geographical pricing has come under more government scrutiny than any other pricing
        policy.
     d. FOB freight-allowed pricing practices are illegal.
     e. Basing-point pricing is the only form of geographical pricing that is not under some type of
        legal restriction.

     Answer: b Page: 385 Other Locations: SG
     Rationale: Under the Robinson-Patman Act, basing-point pricing can be illegal. Just like FOB
     origin pricing, FOB freight-allowed pricing practices are also legal. For the most part,
     geographical pricing has been immune to legal and regulatory restrictions, but not completely.
     Hence, Alternative A is not true.

14-147 PREDATORY PRICING                                                              DEFINITION

     _____ is the practice of changing a very low price for a product with the intent of driving
     competitors out of business.
     a. Price fixing
     b. Price discrimination
     c. Predatory pricing
     d. Deceptive pricing
     e. Geographical pricing

     Answer: c Page: 386
     Rationale: Key term definition—predatory pricing




                                               849
14-148 PREDATORY PRICING                                                            APPLICATION

     In the early 1980s, typical round trip coach fares from the East Coast to London were over $500.
     Then Freddie Laker introduced a competing service into Newark at $350. Major airlines
     matched his price--and continued to do so until they drove Laker out of business. Then prices
     shot back up to over $500. A lawsuit filed under the Sherman Act resulted in the judgment that
     the major airlines had explicitly tried to destroy a competitor. Laker's experience is an example
     of:
     a. price fixing.
     b. price discrimination.
     c. predatory pricing.
     d. deceptive pricing.
     e. pricing constraints.

     Answer: c Page: 386
     Rationale: Predatory pricing, the practice Laker encountered, is illegal under the Sherman Act.
     Proving the presence of this practice has been difficult and expensive, but since Laker's case,
     transatlantic airlines have been more careful.

14-149 PREDATORY PRICING                                                              DEFINITION

     Predatory pricing is:
     a. an arrangement a manufacturer makes with a reseller to handle only its products and not
         those of a competitor.
     b. the practice of charging a very low price for a product with the intent of driving competitors
         out of business.
     c. the practice of charging different prices to different buyers for goods of like grade and
         quality.
     d. a conspiracy among firms to set prices for a product or service.
     e. a seller's requirement that the purchaser of one product also buy another product in the line.

     Answer: b Page: 386
     Rationale: Key term definition—predatory pricing




                                               850
14-150 PREDATORY PRICING                                                            APPLICATION

     Bob Biltmore owns dozens of very successful print shops throughout the Midwest. Biltmore's
     shops specialize in low cost black and white copies and feature user-friendly machines
     consumers can easily operate. In recent months, Biltmore has noticed many more competitors
     in the areas where his stores are located. In an attempt to eliminate the competition, Biltmore
     has decided to charge a very low price for his black and white copies, a price so low his
     competitors will be forced out of business. After the competition has been driven out, Biltmore
     plans to raise the price of his copies. Biltmore is planning to engage in the illegal practice of:
     a. price fixing.
     b. price inflation.
     c. predatory pricing.
     d. competitive pricing.
     e. price flighting.

     Answer: c Page: 386
     Rationale: Under the Sherman Act and the Federal Trade Commission Act the practice of
     predatory pricing is illegal—the activity Biltmore plans to undertake . Although difficult to
     prove, marketers cannot deliberately lower prices in order to eliminate competitors while
     intending to increase the price of a product once all competition is erased.

14-151 VIDEO CASE: MY OWN MEALS                                                     APPLICATION

     According to Mary Anne Jackson, president and founder of My Own Meals, "We're premium
     priced because we're a higher quality product than any of our competitors. If we weren't, our
     quality image would be lowered to the image that they have." Ms. Jackson's statement suggests
     that the company has been pursuing a _____ method of selecting an approximate price level
     a. competition-based
     b. profit-based
     c. cost-based
     d. demand-based
     e. experience-based

     Answer: d Page: 388-389
     Rationale: Jackson's statement suggests that the company has been pursuing a prestige pricing
     strategy, which is a demand-oriented approach of selecting an approximate price.




                                               851
14-152 VIDEO CASE: MY OWN MEALS                                                  APPLICATION

     If Mary Anne Jackson, president and founder of My Own Meals, decides that the retail price of
     a children's meal should be $2.30 and she then calculates the price she can charge wholesalers
     by calculating the margins that may have to be paid to retailers and wholesalers, she is
     practicing:
     a. price lining.
     b. penetration pricing.
     c. predatory pricing.
     d. cost plus percentage-of-cost pricing.
     e. target pricing.

     Answer: e Page: 388-389
     Rationale: The process of estimating the price that customers would be willing to pay and then
     working backward through the margins that may have to be paid to retailers and wholesalers to
     determine what price can be charged for the product is called target pricing.




                                              852
                                    CHAPTER 14
                            ARRIVING AT THE FINAL PRICE

                                SHORT ESSAY QUESTIONS

14-153 SKIMMING PRICING                                                         CONCEPTUAL

     When is skimming pricing an effective strategy?

     Answer:
     Skimming pricing is an effective strategy when:
     (1) enough prospective customers are willing to buy the product immediately at the high
         initial price to make those sales profitable
     (2) the high initial price will not attract competitors
     (3) lowering price has only a minor effect on increasing the sales volume and reducing unit
         costs
     (4) customers interpret the high price as signifying high quality.

     Page: 366-367

14-154 APPROXIMATE PRICE LEVEL                                                    DEFINITION

     What are the four common approaches used by managers to help them find an approximate
     price level?

     Answer:
     Four common approaches to helping find this approximate price level are:
     (1) demand-based
     (2) cost-based
     (3) profit-based
     (4) competition-based methods.

     Page: 366

14-155 PENETRATION PRICING                                                      CONCEPTUAL

     What are the conditions favoring the use of penetration pricing?

     Answer:
     The conditions favoring penetration pricing are the reverse of those supporting skimming
     pricing and are:
     (1) many segments of the market are price sensitive
     (2) a low initial price discourages competitors from entering the market
     (3) unit production and marketing costs fall dramatically as production volumes increase.

     Page: 367




                                              853
14-156 ODD-EVEN PRICING                                                                CONCEPTUAL

     Explain why odd-even pricing is sometimes called psychological pricing.

     Answer:
     Odd-even pricing presumes that customers when looking at an item marked $299.99 will see the
     price as something over $200 rather than about $300. This customer reaction is
     psychologically-oriented.

     Page: 368

14-157 EXPERIENCE CURVE PRICING                                                          DEFINITION

     What is experience curve pricing?

     Answer:
     Experience curve pricing is based on the learning effect, which holds that the unit cost of many
     products and services declines by 10 percent to 30 percent each time a firm's experience at
     producing and selling them doubles. This reduction is regular or predictable enough that the
     average cost per unit can be mathematically estimated.

     Page: 371

14-158 LOSS-LEADER PRICING                                                             CONCEPTUAL

     What is a loss-leader and why is it used by retailers?

     Answer:
     For a special promotion many retail stores deliberately sell a product below its customary price
     to attract attention to it. The purpose of this loss-leader pricing strategy is not to increase sales
     of the specific advertised product, but to attract customers in hopes they will buy other products
     as well, particularly discretionary items carrying large markups.

     Page: 374

14-159 ONE-PRICE AND FLEXIBLE-PRICE POLICIES                                             DEFINITION

     What is the difference between a one-price policy and a flexible-price policy?

     Answer:
     A one-price policy is setting the same price for similar customers who buy the same product and
     quantities under the same conditions. In contrast, a flexible-price policy is offering the same
     product and quantities to similar customers, but at different prices.

     Page: 375-376




                                                 854
14-160 DISCOUNTS                                                                        DEFINITION

     What are discounts? List the four kinds that are especially important in marketing strategy.

     Answer:
     Discounts are reductions from list price that a seller gives a buyer as a reward for some activity
     of the buyer that is favorable to the seller. Four kinds of discounts are especially important in
     marketing strategy. They are:
     (1) quantity discounts
     (2) seasonal discounts
     (3) trade (functional) discounts
     (4) cash discounts.

     Page: 379

14-161 QUANTITY DISCOUNTS                                                               DEFINITION

     What is the difference between noncumulative and cumulative quantity discounts?

     Answer:
     Noncumulative quantity discounts are based on the size of an individual purchase order. They
     encourage large individual purchase orders, not a series of orders. Cumulative quantity
     discounts apply to the accumulation of purchases of a product over a given time period,
     typically a year. They encourage repeat buying (loyalty) by a single customer.

     Page: 379

14-162 PRICES INVOLVING TRANSPORTATION                                               CONCEPTUAL

     What are the two general methods for quoting prices related to transportation costs? Explain
     how each is used.

     Answer:
     The two general methods for quoting prices related to transportation costs are:
     (1) FOB origin pricing
     (2) uniform delivered pricing.

     FOB means "free on board" some vehicle at some location, which means the seller pays the cost
     of loading the product onto the vehicle that is used (such as a barge, railroad car, or truck). FOB
     origin pricing usually involves the seller naming the location of the loading as the seller's
     factory or warehouse. When a uniform delivered pricing method is used, the price the seller
     quotes includes all transportation costs. The four kinds of delivered pricing methods are:
     (1) single-zone pricing
     (2) multiple-zone pricing
     (3) FOB with freight allowed pricing
     (4) basing-point pricing.

     Page: 382-383




                                                855
14-163 UNIFORM DELIVERED PRICING                                                         DEFINITION

     What are the four kinds of delivered pricing methods?

     Answer:
     The four kinds of delivered pricing methods are:
     (1) single-zone pricing
     (2) multiple-zone pricing
     (3) FOB with freight-allowed pricing
     (4) basing-point pricing.

     Page: 382-383

14-164 DECEPTIVE PRICING PRACTICES                                                     APPLICATION

     What are the five most common deceptive pricing practices? Give an example of each one.

     Answer:
     The five most common deceptive pricing practices are:
     1. Bait and Switch. Example: Advertising a very low price on a microwave oven to attract
        customers to the store but persuading them to buy a more expensive model by
        (a) ridiculing the advertised model, or (b) not having the advertised model in stock.
     2. Bargains Conditional on other Purchases. Example: A "Buy 1, Get 1 Free" offer is made on
        paint. However, the price of the first can of paint is inflated to include the price of the "free"
        can of paint.
     3. Comparable Value Comparisons. Example: When a merchant claims "Retail Value
        $100.00, Our Price $85.00", even though the market area price is less than $100.
     4. Comparisons with Suggested Prices. Example: A claim that a price is below a
        manufacturer's suggested price even though few (if any) sales are made at the suggested
        price.
     5. Former Price Comparisons. Example: A seller offers a "reduced" price when the previous
        price was offered only for a short period or was deliberately set high to establish a reference
        point.

     Page: 385 and Figure 14-9

14-165 PREDATORY PRICING                                                                 DEFINITION

     What is predatory pricing?

     Answer:
     Predatory pricing is the practice of charging a very low price for a product with the intent of
     driving competitors out of business. Much of the federal legislation we have today was passed
     in response to the predatory pricing practices of the "robber barons" of the 19th and early 20th
     centuries.

     Page: 386




                                                 856

				
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