Chapter 10

Question 1

PRICING

Answer 1

Price: The sum of the values that consumers exchange for the benefits of having or using the product or service.

Question 2

LIMITS TO PRICE SETTING

Answer 2

Price Ceiling (Demand Limits)

Competitive Factors
Final Pricing Discretion
Corporate Objectives
Price Floor (Direct Variable Costs)

Question 3

PRICE SETTING DECISION PROCESS

Answer 3

1) Set strategic pricing objectives
2) Estimate demand and price elasticity
3) Estimate cost, volume, and profit relationships
4) Adopt a pricing strategy

Question 4

PRICING OBJECTIVES

Answer 4

Four Primary Objectives Often Guide Pricing Decisions:

1) Maximizing company profits.
2) Enhancing sales growth.
3) Deterring competition from entering a company’s niche or market position.
4) Establishing or maintaining a particular product quality image.

Question 5

COSTS

Answer 5

Profit = TR – TC where TR = total revenue
TC = total costs

TR = P x Q where P = price
Q = quantity sold

TC = FC + (VC x Q) where FC = Fixed costs
VC = Variable costs

Question 6

BREAK-EVEN ANALYSIS

Answer 6

Break-even analysis: involves calculating the number of units that must be sold, at a certain price, to cover costs.

Break even point (BEP) =
FC
———
(P – VC)

Question 7

Break-even analysis: involves calculating the number of units that must be sold, at a certain price, to cover costs.

Break even point (BEP) = FC
(P – VC)

Answer 7

Cost-plus pricing: a product’s price is determined by adding a set percentage to it’s cost.

Based on unit cost:
Price = Unit cost + (Unit cost x markup %)

Based on selling price:
Price = Unit cost
(1 – markup %)

Question 8

PRICING STRATEGIES:

COST-BASED APPROACHES

Answer 8

Target return pricing: price is determined based on a desired return.

Price =   (Return + Fixed costs)   +   Variable costs
   	Expected unit sales

Question 9

PRICING STRATEGIES:

COMPETITION-BASED APPROACHES

Answer 9

1) Customary Pricing

2) Above, At, or Below Market Pricing

Question 10

PRICING STRATEGIES:

DEMAND-BASED APPROACHES

Answer 10

1) Skimming Pricing
2) Penetration Pricing
3) Odd-Even Pricing
4) Bundling