Unit 2 Acc Chapter 10 Review Questions Flashcards
RQ 10.1 // Service vs. Trading FirmsQ1. Explain the difference between how a service firm and a trading business operates or functions.
A trading firm aims to generate a profit by selling a good rather than a service; that is, by selling a physical item of stock rather than their time, labour or expertise (which is what is required for a service firm)
RQ 10.1 // Service vs. Trading FirmsQ2. State the different form of revenue that a service firm would earn compared to that of a trading business.
A service firm will generate fees as their revenue whereas a trading business will generate sales as their revenue.
RQ 10.2 // Pricing & ProfitQ1. Explain why prices must not be set too high.
If prices are set too high, customers may be driven into the arms of the firm’s competitors, and insufficient sales will be made.
RQ 10.2 // Pricing & ProfitQ2. Explain why prices must not be set too low
If prices are set too low, the business may generate plenty of sales, but those sales will not provide sufficient revenue to meet expenses, and the firm will not be able to earn a profit.
RQ 10.2 // Pricing & ProfitQ3. State two reasons why a business owner must set a desired minimum profit.
i) that the business earns a profit comparable with their previous income (usually from paid employment)ii) a return similar to what they would have earned had they invested their funds elsewhere.
RQ 10.2 // Pricing & ProfitQ4. Show how the desired minimum profit is calculated.
Wage equivalent + Desired return on investment= Minimum desired profitWE - ($600 per week x 52 weeks) $31 200DROI - 5% x $15 000 750MDP $31 950
RQ 10.3 // Pricing MethodsQ1. List the various techniques which can be used by a small business to set selling prices.
• Recommended retail price• Competitors’ prices• Market reaction• Percentage mark-up• Cost-volume-profit analysis.
RQ 10.3 // Pricing MethodsQ2. State two reasons in favour of using recommended retail price.
• It is the selling price suggested by the manufacturer or wholesaler of goods. Thus, the owner does not need to work out a selling price• Using recommended retail price may create some pressure to follow suit to ensure that prices remain competitive.
RQ 10.3 // Pricing MethodsQ3. State one reason why recommended retail price cannot be used to set all prices.
Not all products can use recommended retail price because only the manufacturer or wholesaler on goods (such as books, magazine and cards) will suggest a recommended retail price.
RQ 10.3 // Pricing MethodsQ4. Explain why it is important to account for the prices charged by competitors.
It is important so that they are comparable with those prices set by their competitors. If prices are set too high, then sales will be lost to cheaper competitors and profit will suffer.
RQ 10.3 // Pricing MethodsQ5. Explain how the reaction of the market can lead to increased selling prices and decreased selling prices.
• increased selling prices – if demand is particularly high for a product, customers will be so keen to get their hands on the product that they will be willing to pay a higher price.• decreased selling prices – if there is no demand at a particular price, the business will have no choice but to discount its prices to generate sales.
RQ 10.3 // Pricing MethodsQ6. Explain one limitation of relying on recommended retail price, competitors’ prices and the market reaction to set prices.
These three techniques for setting selling prices are based more on observation than calculation, and require the owner to be aware of the market in which the business is operating. However, while they may ensure that the firm’s prices are competitive and reasonable to the market, setting prices in this way does not ensure that the most basic goal of all – that of earning a profit – will be achieved.
RQ 10.4 // Mark UpQ1. Define the term ‘mark-up’.
A mark-up is a predetermined profit margin (expressed as a set amount, or a percentage of the cost price) that is added to the cost price of a product to determine its selling price.
RQ 10.4 // Mark UpQ2. Explain the circumstances in which it would be appropriate to use a percentage mark-up to set selling prices.
In businesses such as those that sell electronic or white goods, knowing the mark-up on particular products allows sales staff to discount selling prices to generate sales, while still maintaining a minimum profit margin.
RQ 10.4 // Mark UpQ3. Show the formula for calculating selling prices using a percentage mark-up.
Selling price (mark-up price) = Cost price x (1 + mark-up/100)
