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Answers To Chapter 14
Questions
2. What would be your response to the
statement, "Profit maximization is the only
legitimate pricing objective for the firm."
2. What would be your response to the statement, "Profit
maximization is the only legitimate pricing objective for the
firm."
Profit maximization is not the only legitimate
pricing objective for a firm. Often, a target
return objective or a long-run profit
objective is set by a firm. Non-profit goals
such as unit sales objectives, market share
objectives, as well as objectives influenced
by feelings of social responsibility are also
legitimate pricing goals. Example - AIDS
medications for Africa priced at cost.
4. A marketing executive once said, "If the
price elasticity of demand for your product is
inelastic, then your price is probably too low."
What is this executive saying in terms of the
economic principles discussed in this chapter?
4. A marketing executive once said, "If the price elasticity of
demand for your product is inelastic, then your price is
probably too low." What is this executive saying in terms of
the economic principles discussed in this chapter?
If the price elasticity of demand for a given
product is inelastic, then a price increase
will also increase total revenue. Therefore,
the executive is saying that a price increase
will increase total revenue.
4. A marketing executive once said, "If the price elasticity of
demand for your product is inelastic, then your price is
probably too low." What is this executive saying in terms of
the economic principles discussed in this chapter?
If the price elasticity of demand for a given
product is inelastic, then a price increase
will also increase total revenue. Therefore,
the executive is saying that a price increase
will increase total revenue.
The percentage change in quantity demanded
is less than the percentage change in price.
Inelastic Demand
Inelastic demand exists when a small
percentage decrease in price produces a
smaller percentage increase in quantity
demanded. For example, gasoline has no
substitutes, and is price inelastic.
Example - people are willing to pay the cost
of life saving drugs - or - status symbols so a price increase decreases demand by a
smaller percentage.
5. A marketing manager reduced the price on
a brand of cereal by 10 percent and observed a
25 percent increase in quantity sold.
The manager then thought that if the price
were reduced by another 20 percent, a 50
percent increase in quantity sold would occur.
What would be your response to the
marketing manager's reasoning?
5. A marketing manager reduced the price on a brand of cereal by 10 percent and
observed a 25 percent increase in quantity sold. The manager then thought that if
the price were reduced by another 20 percent, a 50 percent increase in quantity
sold would occur. What would be your response to the marketing manager's
reasoning?
The marketing manager is reasoning that if he
doubles the price cut on the brand of cereal, then
quantity sold will also double.
This would imply that the actual demand curve for
this particular product is a straight line and that
price elasticity of demand is the same over all
possible prices of the product. However, in
actuality, demand curves are generally convex and
price elasticity varies at different prices along the
demand curve.
Convex Demand Curve
P
r
I
c
e
Quantity
6. A student theater group at a university has
developed a demand schedule that shows the
relationship between ticket prices and demand
based on a student survey, as follows:
6. A student theater group at a university has
developed a demand schedule that shows the
relationship between ticket prices and demand
based on a student survey, as follows:
Ticket Price
$1
$2
$3
$4
$5
Number of Students
Who Would Buy
300
250
200
150
100
6a. Graph the demand curve and the total
revenue curve based on these data.
What ticket price might be set based on this
analysis?
6a. Graph the demand curve and the total revenue
curve based on these data. What ticket price might
be set based on this analysis?
DEMAND CURVE
$5
x
$4
x
$3
x
Price $2
x
$1
x
0 ________________________
100 150 200 250 300
Quantity Sold
6a. Graph the demand curve and the total revenue
curve based on these data. What ticket price might
be set based on this analysis?
TOTAL REVENUE CURVE
$600
x
x
$500 x
x
$400
Total
$300
x
Revenue $200
$100 ___________________________
100
150 200
250 300
Quantity Sold
6a. Graph the demand curve and the total revenue
curve based on these data. What ticket price might
be set based on this analysis?
Based on this analysis, ticket price could be
set at $3. At this price, total revenue is
highest and audience size is maximized.
The total revenue is the same at $4, but costs
are lower and profitability may be higher.
6b. What other factors should be considered
before the final price is set?
6b. What other factors should be considered before
the final price is set?
Other factors that should be considered
include the total costs of the theater
production, the seating capacity of the
theater, the responsibility of the theater to
charge a price that all students can afford,
and the sale of other products such as
programs, candy, tickets for the next event.
Answer - $3 or $4 depending on your goals.
7. Touchè Toiletries, Inc., has developed an
addition to its Lizardman Cologne line
tentatively branded Ode of d'Toadè Cologne.
Unit variable costs are 45 cents for a 3-ounce
bottle, and heavy advertising expenditures in
the first year would result in total fixed costs
of $900,000.
Ode d'Toadè Cologne was priced at $7.50 for
a 3-ounce bottle. How many bottles of Ode
d'Toadè must be sold to break even?
Q 7. Breakeven Analysis
Break-Even Quantity =
Fixed Costs_____
Price - Unit Variable Cost
BEQ =
$900,000__
$7.50 - $0.45
BEQ =
127,660 units
8. Suppose that marketing executives for
Touchè Toiletries reduced the price to $6.50
for a 3-ounce bottle of Ode d'Toadè and the
fixed costs were $1,100,000.
Suppose further than the unit variable cost
remained at 45 cents for a 3-ounce bottle.
(a) How many bottles must be sold to break
even?
(b) What dollar profit level would Ode
d'Toadè achieve if 200,000 bottles were sold?
Q8a. How many bottles must be sold to break
even?
BEQ =
Fixed Costs_____
Price - Unit Variable Cost
BEQ
=
$1,100,000
$6.50 - $0.45
BEQ
=
181,818 units
Q8b. What dollar profit level would Ode
d'Toadè achieve if 200,000 bottles were sold?
Profit =
=
Total Revenue - Total Cost
(P X Q) - [FC + (UVC X Q)]
= ($6.50 X 200,000) - [$1,100,000 + ($.45 X $200,000)]
=
$1,300,000 - ($1,100,000 + $90,000)
=
$ 110,000
9.Executives of Random Recordings, Inc., produced
an album entitled Sunshine/Moonshine by the
Starshine Sisters Band. The cost and price
information was as follows:
Album cover
Songwriter's royalties
Recording artists' royalties
Direct material and labor costs
Fixed cost of producing album
(advertising, studio fee, etc.)
Selling price
1.00 per album
0.30 per album
0.70 per album
1.00 per album
100,000.00
7.00 per album
9a. Prepare a chart like Figure 14-10 showing total
cost, fixed cost, and total revenue for album quantity
sold levels starting at 10,000 albums through
100,000 albums at 10,000 album intervals, that is,
10,000, 20,000, 30,000, and so on.
9b. What is the break-even point for the album?
9a. Prepare a chart like Figure 14-10 showing total
cost, fixed cost, and total revenue for album quantity
sold levels starting at 10,000 albums through
100,000 albums at 10,000 album intervals, that is,
10,000, 20,000, 30,000, and so on.
9b. What is the break-even point for the album?
Answer …
The breakdown point is 25,000 units (see handout)
Do We Need A Break
or
Should We keep Going?
Answers To Chapter 15
Questions
1. Under what condition would a camera
manufacturer adopt a skimming price
approach for a new product? A penetration
approach?
1. Under what condition would a camera manufacturer adopt
a skimming price approach for a new product? A penetration
approach?
A camera manufacturer might adopt a
skimming price approach for a new
product if the new product is unique and
already has a significant prospective
customer base. Some type of protection
from competitive products such as a patent
would also enhance the effectiveness of a
skimming strategy. Skimming means a
higher price for the product.
1. Under what condition would a camera manufacturer adopt
a skimming price approach for a new product? A penetration
approach?
A penetration price approach might be
adopted if the new product unit production
and marketing cost fall dramatically as
production volume increased and if many
segments of market are price-sensitive.
Such a product would most likely appeal to
a broad segment of the population and be
positioned as a "me-too" type product. A
penetration price is usually a lower price.
2. What are some similarities and differences
between skimming pricing, prestige pricing,
and above-market pricing?
2. What are some similarities and differences between
skimming pricing, prestige pricing, and above-market
pricing?
Skimming, prestige, and above-market pricing
all involve setting a premium price for a
product, hoping consumers will associate
high quality with high price. Generally,
these three pricing strategies are most
effective when product demand is inelastic.
2. What are some similarities and differences between
skimming pricing, prestige pricing, and above-market
pricing?
Frequently, a skimming price approach is used
when there are no competitively positioned
products, and therefore, prices, to use as a
benchmark, while an above-market price
strategy requires a competitive reference
point or price. Prestige pricing, on the
other hand, typically requires a greater
subjective component than the other two
methods. A Rolex.
3.A producer of microwave ovens has adopted
an experience curve pricing approach for its
new model.
The firm believes it can reduce the cost of
producing the model by 20 percent each time
volume doubles. The cost to produce the first
unit was $1000.
What would be the approximate cost of the
4,096th unit?
3. What would be the approximate cost of the 4,096th unit?
UNIT#
COST
1
=
$1,000
2 = (.80) (1,000)= $ 800
4 = (.80) ( 800)= $ 640
8 = (.80) ( 640)= $ 512
16 = (.80) ( 512)= $ 410
32 = (.80) ( 410)= $ 328
64 = (.80) ( 328)= $ 262
UNIT#2
128
256
512
1024
2048
4096
= (.80) (262)
= (.80) (210)
= (.80) (168)
= (.80) (134)
= (.80) (107)
= (.80) ( 86)
COST
=$
= $
= $
= $
= $
= $
210
168
134
107
86
68
4. The Hesper Corporation is a leading
manufacturer of high-quality upholstered
sofas. Current plans call for an increase of
$600,000 in the advertising budget.
If the firm sells its sofas for an average price
of $850 and the unit variable costs are $550,
then what dollar sales increase will be
necessary to cover the additional advertising?
4. What dollar sales increase will be necessary to cover the
additional advertising?
Incremental number of units = Incremental Fixed Cost
Price - Unit Variable Cost
2,000 units
=
$600,000
$850-$550
The dollar sales increase necessary to cover the increased
fixed cost is:
2,000 units x $850 = $1,700,000
5. Suppose executives estimate that the unit
variable cost for their VCR is $100,
the fixed cost related to the product is $10
million annually,
and the target volume for next year is 100,000
recorders.
What sales price will be necessary to achieve
a target profit of $1 million?
5. What sales price will be necessary to achieve a target profit
of $1 million?
Profit =
Profit=
Total Revenue - Total Cost
(P x Q) - [FC + (UVC x Q)]
$1,000,000= (P x 100,000) - [$10,000,000 + ($100x100,000)]
$1,000,000= 100,000 P - ($10,000,000 + $10,000,000
100,000 P
Price
=
=
$21,000,000
$210
6. A manufacturer of motor oil has a trade
discount policy whereby the manufacturer`s
suggested retail price is $30 per case with the
terms of 40/20/10.
The manufacturer sells its products through
jobbers, who sell to wholesalers, who sell to
gasoline stations.
What will the manufacturer's sales price be?
6. What will the manufacturer's sales price be?
Terms
40/20/10
Manufacturers suggested retail price (MRP) $30
Subtract 40% of MRP
$12
Retail cost …………………….. $18
Subtract 20% of retail cost
$ 3.60
Wholesale cost ………………... $14.40
Subtract 10% of wholesale cost $ 1.44
Jobber cost or manufacturer's sale price …... $12.96
7. What are the effective annual interest rates
for the following cash discount terms?
(a) 1/10, net 30,
(b) 2/10, net 30, and
(c) 2/10, net 60?
7. What are the effective annual interest rates for the
following cash discount terms?
a.
.01
x
360 =
30-10
18%
b.
.02
x
360 =
30-10
36%
c.
.02
x
360 =
60-10
14.4%
8. Suppose a manufacturer of exercise equipment
sets a suggested price to the consumer of $395 for a
particular piece of equipment to be competitive with
similar equipment.
The manufacturer sells its equipment to a sporting
goods wholesaler who receives a 25 percent markup
and a retailer who receives a 50 percent markup.
What demand-based pricing method is being used,
and at what price will the manufacturer sell the
equipment to the wholesaler?
8. What demand-based pricing method is being used, and at
what price will the manufacturer sell the equipment to the
wholesaler?
The pricing method is being used in this case is a demandbackward pricing method.
Suggested retail price $395.00 …. wholesale price $197.50
retail markup (%) x
.00 wholesale markup
.25
retailer markup
$197.50
$ 49.37
retailer cost
$395.00
197.50
$197.50
$197.00
49.37 wholesaler cost
$148.13 manufacturer's
sales price
9. Is there any truth in the statement,
"Geographic pricing schemes will always be
unfair to some buyers"?
Why or why not?
9. Is there any truth in the statement, "Geographic pricing
schemes will always be unfair to some buyers"? Why or why
not?
Unless a geographic pricing scheme
individually figures transportation
charges for each wholesaler and retailer in
the distribution channel, some buyers will
be priced "unfairly" due to the uniform
pricing schemes.