11.3 Pricing Flashcards
Which one of the following phases of a product’s life cycle do sales continue to increase but at a decreasing rate, while prices fall, and product differentiation is no longer important?
A. Growth phase.
B. Decline phase.
C. Maturity phase.
D. Introduction phase.
C. Maturity phase.
In the maturity phase of the product life cycle, sales peak but growth declines. Competitors are numerous, thus leading to falling prices. Product differentiation is not particularly important because many dealers are producing the same item.
A company provides contracted bookkeeping services. The company has annual fixed costs of $100,000 and variable costs of $6 per hour. This year the company budgeted 50,000 hours of bookkeeping services. The company prices its services at full cost and uses a cost-plus pricing approach. The company developed a billing price of $9 per hour. The company’s markup level would be
A. 33.3%
B. 66.6%
C. 50.0%
D. 12.5%
D. 12.5%
Markup is the ratio of per-unit operating income to per-unit cost. The variable cost of a unit is $6 and the fixed cost is $2 ($100,000 total ÷ 50,000 units). Thus, the full cost of a single unit is $8 ($6 + $2), and the operating income is $1 ($9 selling price – $8 cost). The company’s markup is therefore 12.5% ($1 ÷ $8).
Which one of the following pricing methods takes into consideration a product’s entire life cycle?
A. Market-based pricing.
B. Transfer pricing.
C. Target pricing.
D. Cost-based pricing.
C. Target pricing.
A target price is the expected market price for a product or service, given the company’s knowledge of its consumers’ perceptions of value and competitors’ responses. Subtracting the unit target operating income determines the long-term unit target cost. Relevant costs are all future value-chain costs, whether variable or fixed.
Product X was launched 10 years ago as an innovative product. The initial price was relatively high, which yielded a high profit margin. The market for Product X is now becoming very competitive, and demand for the product is slowing. What pricing strategy should the company follow for Product X based on the current market conditions?
A. Prices should be held steady with only inflation adjustments.
B. Because of the increased competition, Product X’s price should be decreased.
C. The company should sell Product X below cost so that it can force competitors out of the market.
D. Pricing for Product X should be at its highest level to recoup its innovation R&D
B. Because of the increased competition, Product X’s price should be decreased.
When competition increases, market participants often target price as a distinguishing factor of their product. They will attempt to set the price of their product as low as possible in the hopes of driving out weaker competition. However, setting the price is a delicate balance because the price should be low enough to encourage purchases from customers but also high enough that the company is able to maintain operations in both the short and long term. Therefore, Product X’s price should be decreased.
The management of a company is attempting to reduce the cost for Product X by analyzing the trade-offs between different types of product features and total product cost. What type of cost reduction strategy is the company using?
A. Total quality management.
B. Value engineering.
C. Activity-based costing.
D. Kaizen.
B. Value engineering.
Value engineering is a means of reaching targeted cost levels. It is a Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs.
In target costing,
A. Only raw materials cannot exceed a threshold target.
B. Only raw materials, labor, and variable overhead cannot exceed a threshold target.
C. The market price of the product is taken as a given.
D. Raw materials are recorded directly to cost of goods sold.
C. The market price of the product is taken as a given.
Target costing begins with a target price, which is the expected market price given the company’s knowledge of its customers and competitors. Subtracting the unit target profit margin determines the long-term target cost. If this cost is lower than the full cost, the company may need to adopt comprehensive cost-cutting measures. For example, in the furniture industry, certain price points are popular with buyers: a couch might sell better at $400 than at $200 because consumers question the quality of a $200 couch and thus will not buy the lower-priced item. The result is that furniture manufacturers view $400 as the target price of a couch, and the cost must be lower.
A firm is introducing a new product. Management considers the sales life cycle to strategically determine pricing on this innovative product. They decide to price the new product low to generate excitement. Which one of the following pricing approaches did management implement?
A. Price skimming.
B. Market-based pricing.
C. Cost-based pricing.
D. Penetration pricing.
D. Penetration pricing.
Penetration pricing is the practice of setting an introductory price relatively low to gain deep market penetration quickly.
