Supply Chain Management: Strategy, Planning, and Operation, 7e (Chopra)
Chapter 16 Pricing and Revenue Management in a Supply Chain
16.1 True/False Questions
1) Revenue management is the use of marketing to increase the profit generated from a limited
supply of supply chain assets.
2) Pricing may influence demand if customers are price sensitive.
3) Revenue management may also be defined as the use of differential pricing based on customer
segment, time of use, and product or capacity availability to increase supply chain surplus.
4) Revenue management adjusts the pricing and available supply of assets to maximize profits.
5) In theory, the concept of differential pricing decreases total cost for a firm.
6) To differentiate between the various market segments, the firm must either eliminate barriers
that identify product or service attributes the segments value differently.
7) In most instances of differential pricing, demand from the segment paying the lower price
arises earlier in time than demand from the segment paying the higher price.
8) Spoilage occurs when the capacity reserved for higher price buyers is wasted because demand
from the higher price segment does not materialize.
9) Wastage occurs if higher price buyers have to be turned away because the capacity has already
been committed to lower price buyers.
10) An order from a lower price buyer should be accepted if the expected revenue from a higher
price buyer is lower than the current revenue from the lower price buyer.
11) Unused capacity from the past is extremely valuable.
12) The tactic of varying price over time is suitable for assets such as fashion apparel that have a
clear date beyond which they lose a lot of their value.
13) Effective differential pricing over time will generally increase the level of product
availability for the consumer willing to pay full price, but will decrease total profits for the
retailer.
14) The tactic of overbooking or overselling the available asset is suitable in any situation where
customers are able to cancel orders and the value of the asset drops significantly after a deadline.
15) The basic trade-off to consider during overbooking is between having wasted capacity (or
inventory) because of few cancellations or having a shortage of capacity (or inventory) because
of excessive cancellations.
16) The cost of wasted capacity is the margin that would have been generated if the capacity had
been used for production.
17) The cost of a capacity shortage is the increase in productivity that results from having to go
to a backup source.
18) The goal when making the overbooking decision is to maximize supply chain profits by
minimizing the cost of wasted capacity and the cost of capacity shortage.
19) The amount of the asset reserved for the higher price segment is such that the expected
marginal revenue from the higher priced segment is less than the price to the lower price
segment.
20) Faced with seasonal peaks, an effective revenue management tactic is to charge a higher
price during the peak period and a higher price during off-peak periods.
21) Shifting demand from peak to off-peak periods is beneficial if the discount given during the
off-peak period is more than offset by the decrease in cost because of a smaller peak and the
increase in revenue during the off-peak period.
22) The amount reserved for the spot market should be such that the expected marginal revenue
from the spot market equals the current revenue from a bulk sale.
23) The reserved quantity will be affected by the difference in margin between the spot market
and the bulk sale, but not the distribution of demand from the spot market.
24) Ultimately, a proper understanding of customer preferences and a quantification of the
impact of various tactics on consumer behavior are at the core of successful revenue
management.
25) Any asset that loses value over time is perishable.
26) The forecasting function is not necessary for most revenue management systems.
27) The goal of optimization is to use forecasts of customer behavior to identify a revenue
management tactic that will be most effective.
28) Too low a level of overbooking will lead to unutilized assets and lost revenue.
29) Salespeople must understand the revenue management tactic in place so they can align their
sales pitch accordingly.
30) Customers will have a negative perception of revenue management tactics if they are simply
presented as a mechanism for extracting maximum revenue.
16.2 Multiple Choice Questions
1) Pricing can be used to
A) change available supply.
B) reduce supply chain costs.
C) influence demand if customers are price sensitive.
D) all of the above
2) Revenue management is
A) the use of marketing tools to increase revenue.
B) the use of pricing to increase the profit generated from a limited supply of supply chain assets.
C) a process designed to determine the best use of funds generated through sales.
D) the use of accounting tools to monitor cash flow.
3) Revenue management uses
A) the marketing mix to increase revenue.
B) the supply chain mix to decrease expenses.
C) static pricing to increase revenue.
D) differential pricing to increase revenue.
4) The two forms of supply chain assets are
A) capacity and inventory.
B) capacity and revenue.
C) inventory and revenue.
D) inventory and warehouse space.
5) Revenue management has a significant impact on supply chain profitability if
A) demand is stable and predictable.
B) the value of the product varies in different market segments.
C) the product is sold in many retail outlets.
D) the product has a long shelf life.
6) Revenue management has a significant impact on supply chain profitability if
A) demand is stable and predictable.
B) the value of the product does not change regardless of market.
C) the product is sold both in bulk and on the spot market.
D) the product has a long shelf life.
7) Revenue management may be defined as
A) the use of differential costing based on product or capacity availability to decrease supply
chain cost.
B) the use of differential costing based on customer segment, time of use, and product or
capacity availability to increase profitability.
C) the use of differential pricing based on customer segment, time of use, and product or
capacity availability to decrease supply chain surplus.
D) the use of differential pricing based on customer segment, time of use, and product or
capacity availability to increase supply chain surplus.
8) The use of differential pricing should
A) decrease total profits for a firm.
B) increase total profits for a firm.
C) increase capacity for a firm.
D) decrease capacity utilization for a firm.
9) To differentiate between the various market segments, the firm must
A) create barriers by identifying product or service attributes that the segments value differently.
B) eliminate barriers that identify product or service attributes that the segments value
differently.
C) negotiate separately with different market segments that value product or service attributes
differently.
D) develop pricing structures based on the volume of various product or service attributes.
10) In most instances of differential pricing, demand from the segment paying the lower price
A) arises earlier in time than demand from the segment paying the higher price.
B) arises later in time than demand from the segment paying the higher price.
C) arises about the same time as demand from the segment paying the higher price.
D) arises both earlier and later in time than demand from the segment paying the higher price.
11) The basic trade-off to be considered by the supplier with production capacity is between
A) committing to an order from a high-price buyer or waiting for a lower price buyer to arrive
later on.
B) committing to an order from a lower price buyer or waiting for a high-price buyer to arrive
later on.
C) allowing the market to be controlled by price or capacity.
D) having marketing or operations establish the constraints within which orders are accepted.
12) When the capacity reserved for higher price buyers is wasted because demand from the
higher price segment does not materialize, this is
A) spill.
B) spoilage.
C) wastage.
D) excess.
13) If higher price buyers have to be turned away because the capacity has already been
committed to lower price buyers, this is
A) spill.
B) spoilage.
C) wastage.
D) excess.
14) An order from a lower price buyer
A) should always be accepted rather than waiting for potential revenue from a higher price
buyer.
B) should only be accepted if the expected revenue from a higher price buyer is higher than the
current revenue from the lower price buyer.
C) should be accepted if the expected revenue from a higher price buyer is lower than the current
revenue from the lower price buyer.
D) should not be accepted if the expected revenue from a higher price buyer is lower than the
current revenue from the lower price buyer.
15) The amount of the asset reserved for the higher price segment is such that
A) all orders from the lower priced segment will be accepted and filled.
B) the expected marginal revenue from the higher priced segment is more than the price to the
lower price segment.
C) the expected marginal revenue from the higher priced segment is less than the price to the
lower price segment.
D) the expected marginal revenue from the higher priced segment equals the price to the lower
price segment.
Scenario 16.1 — The Stone Lion
The Stone Lion, a bed and breakfast located in a sleepy town, caters to two groups of customers,
young couples interested in something marginally more exotic than a staycation, and corporate
clients interested in doing some team-building at a location with no cellular service. Corporations
know they can get rooms with minimal notice, but young couples on tight budgets tend to plan
well in advance of their planned stay at the property. The corporate rate for rooms is $250 per
person and the demand pattern is normal with a mean of 20 and a standard deviation of 10. The
proprietor of the Stone Lion takes pity on the young couples and charges them only $150 for
identical accommodations.
16) How many rooms should be reserved for corporate clients?
A) 17
B) 14
C) 13
D) 10
17) If the price young couples are willing to pay increases by 50%, how many rooms should be
reserved for corporate clients?
A) 17
B) 7
C) 4
D) 10
18) If the corporate demand and standard deviation both decrease by 50%, how many rooms
should be reserved for corporate clients?
A) 7
B) 8
C) 9
D) 10
19) What is the difference in the number of rooms that should be held by the Stone Lion if the
standard deviation of corporate demand increases by five and if it decreases by five?
A) 1
B) 2
C) 3
D) 4
20) If the corporate price and young couples’ price both double, how many additional rooms
should the Stone Lion hold for corporate clients?
A) 3
B) 2
C) 1
D) 0
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Scenario 16.5 — Sanitary Landfill
The sanitary landfill charges companies $150 per load and individuals $40 per load. On average,
80 companies tip their trucks each day at the landfill with a standard deviation of 15. There is
time only for 110 deliveries in any combination of companies and individuals throughout the
course of an eight-hour day. Company dump trucks enter through Gate A and individuals enter
through Gate B. Individual demand is plentiful — often there are individuals turned away due to
lack of capacity.
21) Refer to Scenario 16.5. How many company dump trucks should be admitted each day?
A) 85
B) 87
C) 89
D) 91
22) Refer to Scenario 16.5. How many individuals should be admitted each day?
A) 15
B) 17
C) 19
D) 21
23) Refer to Scenario 16.5. It costs the landfill $10 to process a company dump truck and $5 to
process an individual load. How many individuals should be admitted each day?
A) 20
B) 22
C) 24
D) 26
24) Refer to Scenario 16.5. It costs the landfill $10 to process a company dump truck and $5 to
process an individual load. What is the expected profit for one day if the landfill allocates the
optimal quantity of capacity to company trucks and individuals fill up the remainder of the
capacity?
A) $13,000
B) $13,300
C) $13,600
D) $13,900
25) Refer to Scenario 16.5. It costs the landfill $10 to process a company dump truck and $5 to
process an individual load. What is the difference in one day’s expected profit between operating
with revenue management and operating without using the technique?
A) $6,320
B) $7,230
C) $8,560
D) $9,450
26) In order for a freight railroad to take advantage of revenue management opportunities,
A) there must be no air freight.
B) they should establish regularly scheduled trains.
C) they must reserve one box car on each train for luxury items.
D) there must be no air freight or truck transportation.
27) Which of these combinations of goods is currently offered as a means of revenue
management?
A) DVDs and streaming services
B) Extra crispy and original recipe fried chicken
C) Paperback and hard cover books
D) Rolls Royce vehicles and General Motors vehicles
28) The tactic of varying price over time is suitable for assets
A) that do not have a clear date beyond which they lose a lot of their value.
B) that have a clear date beyond which they lose a lot of their value.
C) where customers are able to cancel orders and the value of the asset drops significantly after a
deadline.
D) where customers are unable to cancel orders and the value of the asset drops significantly
after a deadline.
29) Effective differential pricing over time will generally
A) decrease the level of product availability for the consumer willing to pay full price and also
decrease total profits for the retailer.
B) decrease the level of product availability for the consumer willing to pay full price but will
increase total profits for the retailer.
C) increase the level of product availability for the consumer willing to pay full price and also
increase total profits for the retailer.
D) increase the level of product availability for the consumer willing to pay full price but will
decrease total profits for the retailer.
30) The tactic of overbooking or overselling the available asset is suitable where
A) there is a clear date beyond which the asset loses a lot of its value.
B) there is no clear date beyond which the asset loses a lot of its value.
C) customers are able to cancel orders and the value of the asset drops significantly after a
deadline.
D) customers are unable to cancel orders and the value of the asset drops significantly after a
deadline.
31) The basic trade-off to consider during overbooking is between
A) having wasted capacity (or inventory) or a shortage of capacity (or inventory).
B) having lost sales or a shortage of capacity (or inventory).
C) having wasted capacity (or inventory) or excess capacity (or inventory).
D) having high sales or a shortage of capacity (or inventory).
32) Wasted capacity (or inventory) occurs when
A) there are excessive cancellations.
B) there are few cancellations.
C) an expensive backup needs to be arranged.
D) all of these