Chapter 14

Question 1

Keystone method

Answer 1

Set price at a fixed percent over cost of merchandise.

Retail price by doubling it

Question 2

Markup %

Answer 2

= (retail -cost)/retail

Question 3

Initial markup %

Answer 3

Initial mu%= merchandise cost/ (100%+reduction %)

Mmu% is same as GM%

Question 4

What is the maintained markup percentage on coffee makers if cost of goods sold is $70,000 and net sales are $140,000?

Answer 4

140,000-70,000/140,000

=50%

Question 5

Initial Retail $

Answer 5

Initial R$ = Cost / (100%-IMU%)

IMU% = 42.5% + 15%
             100% + 15%
             = 50%
Initial R$ = Cost / (100%-IMU%)
              = $18/50% 
              = $36.00

Question 6

The merchandise cost for a Kim toaster is $63.00 and the store wants to use an initial markup of 62%. Calculate the initial retail price

Answer 6

=Cost/(100%-IMU%)
=63/(100%-62%)
=165.79

Question 7

Setting Retail Price Based on Demand

Answer 7

• Based on customer price sensitivity and cost
• Charges as much as customers are willing to pay
• Considers the wants and needs of the target market
• Consider the effect of price changes on sales and profit
• Attempts to achieve target levels of profits
• Set prices to maximize profits

Question 8

Price Elasticity Formula

Answer 8

Price Elasticity = % change in q’ty sold (or demand)/ % change in price

(new q’ty sold – old q’ty sold)/old q’ty sold / (new price – old price)/(old price)

Question 9

What is the price elasticity estimated by the retailer for this product in case the retailer increases the price from $25 to $35? Is the product price elastic or inelastic? If it is elastic or inelastic, what does that mean?

Answer 9

Old price 25 and 35 new price
(1200quantity -1500q)/1500
(35-25)/25
=-.50
Price insensitive (inelastic)

Question 10

Demand-based pricing: T or F

is based on how much customers are willing to pay

Answer 10

True

Question 11

Demand-based pricing: T or F

is based on customer price sensitivity and cost

Answer 11

true

Question 12

Demand-based pricing: T or F

attempts to achieve target levels of profits

Answer 12

True

Question 13

Demand-based pricing: T or F

is used to determine profit-maximization prices

Answer 13

True

Question 14

Demand-based pricing: T or F

is easy to implement

Answer 14

False

Question 15

Break-Even Analysis

Answer 15

BEP= TOTAL FIXED COSTS/ ACTUAL UNIT SALE PRICE -UNIT VARIABLE COST

Question 16

Fixed Cost

Answer 16

Cost that are stable and don’t change with the q’ty of product that’s produced and sold

Question 17

Variable Cost

Answer 17

Cost that varies with the level of production and/or sales

Question 18

Market share to break even formula

Answer 18

Market Share to break-even 
=        BEP units/
Total units (market size)

Question 19

Complementary method:

Cost-oriented pricing strategy

Answer 19

Retailers may use this strategy as a starting point

Question 20

Complementary method:

Competition-oriented pricing strategy

Answer 20

Retailers may use this strategy for an outside check in the market place.

Question 21

Complementary method:

Demand-oriented pricing strategy

Answer 21

Retailers may use this strategy to fine-tune their pricing strategy