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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.

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Presentation on theme: "Answers To Chapter 14 Questions. 2. What would be your response to the statement, "Profit maximization is the only legitimate pricing objective for the."— Presentation transcript:

1 Answers To Chapter 14 Questions

2 2. What would be your response to the statement, "Profit maximization is the only legitimate pricing objective for the firm."

3 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 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?

5 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.

6 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.

7 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.

8 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?

9 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.

10 Convex Demand Curve PrIcePrIce Quantity

11 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:

12 Number of Students Ticket Price Who Would Buy $1 300 $2 250 $3 200 $4 150 $5 100

13 6a. Graph the demand curve and the total revenue curve based on these data. What ticket price might be set based on this analysis?

14 DEMAND CURVE $5 x $4 x $3 x Price$2 x $1 x 0 ________________________ Quantity Sold

15 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 ___________________________ Quantity Sold

16 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.

17 6b. What other factors should be considered before the final price is set?

18 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.

19 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?

20 Q 7. Breakeven Analysis Break-Even Quantity = Fixed Costs_____ Price - Unit Variable Cost BEQ = $900,000__ $ $0.45 BEQ =127,660 units

21 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?

22 BEQ = Fixed Costs_____ Price - Unit Variable Cost BEQ = $1,100,000 $ $0.45 BEQ = 181,818 units Q8a. How many bottles must be sold to break even?

23 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

24 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 cover1.00 per album Songwriter's royalties0.30 per album Recording artists' royalties0.70 per album Direct material and labor costs 1.00 per album Fixed cost of producing album 100, (advertising, studio fee, etc.) Selling price7.00 per album

25 9a. Prepare a chart like Figure 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?

26 9a. Prepare a chart like Figure 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)

27 Do We Need A Break or Should We keep Going?

28 Answers To Chapter 15 Questions

29 1. Under what condition would a camera manufacturer adopt a skimming price approach for a new product? A penetration approach?

30 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.

31 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.

32 2. What are some similarities and differences between skimming pricing, prestige pricing, and above-market pricing?

33 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.

34 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.

35 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?

36 3. What would be the approximate cost of the 4,096th unit? UNIT#COSTUNIT#2 COST 1= $1,000128= (.80) (262)= $ 210 2= (.80) (1,000)= $800256= (.80) (210)= $ 168 4= (.80) ( 800)= $640512= (.80) (168)= $ 134 8= (.80) ( 640)= $ = (.80) (134)= $ = (.80) ( 512)= $ = (.80) (107)= $ 86 32= (.80) ( 410)= $ = (.80) ( 86)= $ 68 64= (.80) ( 328)= $262

37 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?

38 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

39 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?

40 5. What sales price will be necessary to achieve a target profit of $1 million? Profit =Total Revenue - Total Cost Profit=(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 P= $21,000,000 Price= $210

41 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?

42 6. What will the manufacturer's sales price be? Terms40/20/10 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

43 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?

44 7. What are the effective annual interest rates for the following cash discount terms? a..01x 360 =18% b..02x 360 = 36% c..02x 360 =14.4% 60-10

45 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?

46 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 demand- backward pricing method. Suggested retail price$ …. wholesale price $ retail markup (%) x.00 wholesale markup.25 retailer markup $197.50$ $ $ retailer cost wholesaler cost $ $ manufacturer's sales price

47 9. Is there any truth in the statement, "Geographic pricing schemes will always be unfair to some buyers"? Why or why not?

48 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.


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