Chapter 4 - Price

Question 1

When a business sets a price for good or a service, what is meant by the term “markup”?

a) Markup is an amount equal to demand divided by product cost
b) Markup is the amount of money left over after all expenses have been deducted from revenues
c) Markup is an amount added to the cost of producing or creating the item, in order to arrive at the selling price
d) Markup is the point at which the firm covers the fixed and variable costs

Answer 1

c) Markup is an amount added to the cost of producing or creating the item, in order to arrive at the selling price

Question 2

Which of the following best represents the meaning of “Penetration Pricing”?

a) A decision to set a price as high as the market will bear, in hopes that a small number of high margin sales will generate enough revenue to lead to profit
b) A decision to set a price as low as possible but still make a contribution, in hopes that a large volume of sales will generate enough revenue to lead to profit
c) A promotional technique that involves establishing a high suggested retail price and then creating excitement by offering large discounts and sales

Answer 2

b) A decision to set a price as low as possible but still make a contribution, in hopes that a large volume of sales will generate enough revenue to lead to profit

Question 3

Larry’s business makes telephone equipment that has a variable cost of $100. Larry sells the product for $150. Using the definition of markup given in the lecture, which of the following is Larry’s markup?

a) 150%
b) 33 1/3 %
c) $50
d) $150
e) None of the above

Answer 3

c) $50

Question 4

Helen’s business makes camera equipment that has a variable cost of $400. Helen sells the equipment at a price of $500. Of the following, what is Helen’s “contribution margin”?

a) 80%
b) 125%
c) 25%
d) 20%
e) None of the above

Answer 4

d) 20%

Question 5

What information is provided to managers who perform a “break-even analysis”?

a) It identifies the amount of markup for any given selling price
b) It identifies the fixed costs at any given volume of sales
c) It shows, at any give selling price, how many units need to be sold in order to make a profit
d) It shows, for any given selling price, where variable costs equal fixed costs

Answer 5

c) It shows, at any give selling price, how many units need to be sold in order to make a profit

Question 6

Joy is considering adding a rack of greeting cards to her product offerings at Crawford Books Limited. Joy would need to buy a display rack, which will cost her $400. She can buy a carton of 250 cards for $500. She is thinking of selling the cards for $4.00 each. At that price, Helen’s breakeven point would occur at _____ cards sold.

a) 400
b) 300
c) 200
d) 100

Answer 6

c) 200

Question 7

Joy discovers that she can buy a slightly used display rack, which will cost her only $300 (not the $400 she would need to pay if it were new). As a result of this cost savings, Joy’s break even is now:

a) 175
b) 150
c) 125
d) 120

Answer 7

b) 150

Question 8

Joy buys the cheaper, second-hand rack, and displays her cards. To her delight, she sells all 250 of her cards. As a result, Joy’s profit from her little business enterprise is:

a) $400
b) $300
c) $200
d) $100
e) $0 – Joy “breaks-even”
f) A loss of -$100

Answer 8

c) $200