Chapter 16—Pricing and Credit Decisions
TRUE/FALSE
1. Setting a price for a product or service is as much art as science.
2. The best pricing practice is to undercut competitors’ prices.
3. Because small businesses are small by definition, pricing and credit considerations are relatively
unimportant to their overall performance.
4. Services are generally easier to price than products.
5. Marketing expenses, factory equipment costs, and salaries of office personnel are considered variable
costs.
6. Average pricing is an appropriate pricing approach for small businesses because the method takes into
consideration both fixed and variable costs.
7. Under certain conditions, pricing at less than total costs makes sense as a long-term strategy.
8. Cost analysis can identify a level below which a price should not be set under normal circumstances.
9. If demand for a product is elastic, a change in price will have little effect on total revenues.
10. Prestige pricing (setting a high price to convey an image of high quality or uniqueness) is a pricing
tactic that reflects competitive advantage.
11. In conducting a comprehensive break-even analysis, a firm must examine both its revenue-cost
relationships and sales forecasts.
12. Break-even analysis begins by determining what sales level is needed to generate a profit.
13. Markup rates should be high enough to cover a product’s cost, other expenses, any price reductions,
and profit.
14. Markups may be expressed as a percentage of either the firm’s cost or the industry-standard cost.
15. Break-even analysis is an accurate tool for pricing because it points directly to the correct price for a
given product.
16. A penetration price strategy is most practical when there is a low threat of short-term competition in
the market or when startup costs must be recovered rapidly.
17. With a skimming price strategy, prices are set lower than what will be the normal, long-range price to
gain more market share.
18. A small business in competition with larger firms is seldom in a position to function as a price leader.
19. Variable pricing strategy occurs where a business sets and advertises a fixed price but gives a discount
for reasons such as the customer’s amount purchased.
20. Price lining refers to the systematic determination of the right price for a product or service.
21. Pricing based on what the market will bear works only for non-standardized products in markets where
there is low competition.
22. Under certain circumstances, local, state, and federal laws must be considered in setting prices in a
small business.
23. If a small business has products that compete with one another, pricing decisions must take into
account the effects of a single product price on the rest of the line.
24. One of the benefits of extending credit to borrowers is that doing so provides better records of
purchases on credit billing statements.
25. Sellers often decide to offer credit to borrowers because it helps with the exchange of purchased items.
26. Because it is a standard practice for many business types, selling on credit cannot often be avoided.
27. In today’s competitive environment, a cash-only seller will outsell a credit selling competitor.
28. Home-based businesses will find it easy to obtain merchant status with credit card companies.
29. Collateral is generally required for open charge accounts.
30. An installment account is a typical trade credit agreement.
31. A revolving charge account would be typical for larger purchases; smaller purchases are typical on
installment accounts.
32. Bank credit cards are widely accepted by retailers who desire to offer credit but do not have their own
credit cards.
33. American Express and Diner’s Club are examples of entertainment credit cards.
34. Debit cards are an alternative to cash.
35. Trade credit is extended to consumers purchasing large volumes of products.
36. In many lines of business, trade credit terms are so firmly set by tradition that a unique policy is
difficult for a small firm to implement.
37. As the result of a 2012 court case, retailers may now add a surcharge to customers’ bills for using a
credit card.
38. For installment selling, the amount of credit should not exceed the repossession value of the goods
sold.
39. Every applicant is credit worthy to some degree.
40. An important source of credit information is the customer’s previous credit history.
41. Trade-credit agencies collect credit information on business firms and consumers in a given area.
42. Credit bureaus maintain credit histories on individuals based on information reported to them by
banks, mortgage companies, department stores, and other creditors.
43. The aging schedule is a categorization of accounts receivable based on the length of time they have
been outstanding.
44. To ensure prompt payment, a business extending credit should have adequate billing records and
collection procedures.
45. The bad-debt ratio is the ratio of bad debts to total sales.
46. The Consumer Credit Protection Act requires that the finance charge for credit be stated as an annual
percentage rate and that creditors specify the procedures used for correcting billing mistakes.
47. The primary purposes of the Equal Credit Opportunity Act are to inform consumers about terms of a
credit agreement and to require creditors to specify how finance charges are computed.
MULTIPLE CHOICE
1. The seller’s measure of what he or she is willing to receive in exchange for transferring ownership or
use of a product or service is
a.
credit.
b.
average pricing.
c.
demand.
d.
price.
2. The total sales revenue of a small business is a direct reflection of
a.
sales volume and credit terms.
b.
price and credit terms.
c.
price and expenses.
d.
sales volume and price.
3. A business will not be successful unless it charges a price for its products that covers its total
a.
cost and a margin of profit.
b.
cost of goods and selling cost.
c.
fixed cost and overhead cost.
d.
variable cost and cost of goods.
4. Commissions paid to a salesperson would be included in
a.
cost of goods sold.
b.
human resources.
c.
overhead costs.
d.
administrative costs.
5. Active Feet, a small manufacturer of shoes, hired an additional vice-president and purchased a barrel
of synthetic rubber used to make shoe soles. These two expenses should be considered a(n) ____ and
a(n) ____, respectively.
a.
selling cost/cost of goods sold
b.
overhead cost/cost of goods sold
c.
selling cost/overhead cost
d.
overhead cost/selling cost
6. In general, products that are consumed in fixed amounts have
a.
constant demand.
b.
elastic demand.
c.
inelastic demand.
d.
variable demand.
7. Hollywood Amusement, a small independent movie theater, decreased the price of admission from $10
to $9. Prior to the price decrease, the business sold 1,000 tickets each month. After the price decrease,
it experienced ticket sales of 1,500 a month. If the change in sales is attributable only to the change in
price, Hollywood Amusement faces ____ for its movie tickets.
a.
elastic demand
b.
constant demand
c.
inelastic demand
d.
variable demand
8. Diamonds and other jewels often carry a high price to convey an image of high quality or uniqueness.
This type of pricing is known as
a.
skimming pricing.
b.
penetration pricing.
c.
variable pricing.
d.
prestige pricing.
9. If the owner of Clarrisa’s Fine Jewelry instructed the sales team to stress the uniqueness of the store’s
hand designed jewelry, a ____ pricing strategy would be expected.
a.
skimming
b.
prestige
c.
follow-the-leader
d.
dynamic
10. Beverly is systematically comparing various cost and revenue estimates in order to determine the
acceptability of alternative prices. Beverly is using:
a.
break-even analysis
b.
price lining
c.
cost functioning
d.
demand functioning
11. The difference between the unit selling price and the unit variable costs and expenses is known as the
a.
average price.
b.
elasticity.
c.
contribution margin.
d.
break-even point.
12. A comprehensive break-even analysis entails
a.
examining revenue-cost relationships and establishing sales forecasts.
b.
analyzing marketing strategy’s effect on revenue and costs.
c.
the use of comparison pricing and contribution margins.
d.
approximating debits, credits, costs and sales.
13. Markup pricing may be expressed in terms of a percentage of either the ____ or the cost.
a.
quantity
b.
operating expenses
c.
selling price
d.
estimated expenses
14. Within the framework of a break-even analysis, an examination of ____ is conducted to determine the
quantity at which the product, with an assumed price, will generate enough revenue to start earning a
profit.
a.
costs
b.
revenues
c.
sales forecasts
d.
costs and revenue
15. Demand for a product typically ______ as price ______.
a.
decreases, increases
b.
decreases, stays the same
c.
stays the same, increases
d.
increases, decreases
16. Fine Framings, a small framing shop, uses markup pricing to arrive at a final selling price. The firm
sells its frames at a price of $25, given a $15 unit cost. Fine Framings’ markup on the selling price is
____, and its markup on cost is ____.
a.
66-2/3%, 40%
b.
40%, 66-2/3%
c.
167%, 67%
d.
250%, 100%
17. Clock Tickers, a small retailer of a quality alarm clock, sells its product for $180. If Clock Tickers
adheres to pricing based on a 35% markup of cost, the firm’s product costs are approximately
a.
$63.
b.
$98.
c.
$133.
d.
$155.
18. The Golf Global Company sells 1,000 shirts annually at a price of $35 each. If the company’s pricing
policies adhere to a 40% markup of selling price, the cost of each shirt is
a.
$14.
b.
$21.
c.
$28.
d.
$32.
19. Tanya would like to gain market share rapidly so she has priced her product at a lower than normal,
long-range market price. Which strategy is Tanya using?
a.
variable pricing
b.
skimming price
c.
price lining
d.
penetration pricing
20. Chocolate Concoctions, a maker of high end chocolate candies, decided to price its boxes of candies
below the long-term market price. The decision was made to increase market share and discourage
other firms from entering the chocolate market. Chocolate Concoctions was implementing a
a.
penetration pricing strategy.
b.
price lining strategy.
c.
skimming price strategy.
d.
variable pricing strategy.
21. A business that has a gaming console intended to compete directly with Sony’s Playstation gaming
console would likely use a ____ pricing strategy.
a.
follow-the-leader
b.
penetration
c.
prestige
d.
variable
22. Troy Bourbon, a local bourbon distillery, initially sold its product at a premium price of $45 because
the company believed consumers would view the bourbon as a prestige item. The company decided
that when startup costs had been fully recovered and competition became imminent, the company
would reduce the price to $30 which was more expected in the market. The distillery is using a
a.
variable pricing strategy.
b.
skimming price strategy.
c.
price lining strategy.
d.
penetration pricing strategy.
23. Retro Hits, a local band covering songs from the 1980’s and 1990’s, decided they wanted to expand to
more college students. Research showed students thought the current $15 ticket price was too high
for a local band. To strengthen ticket demand, Retro Hits began offering $10 tickets to all fans who
checked in on Facebook. The band was using a
a.
variable pricing strategy.
b.
price lining strategy.
c.
skimming pricing strategy.
d.
adaptive pricing strategy.
24. Lorrie Veasey, owner of Our Name is Mud, used discount coupons for special event items to drive
customers to her retail stores. Using such promotions and stating that “the regular price is never
chiseled in stone” would indicate Lorrie is using a
a.
variable pricing strategy.
b.
price lining strategy.
c.
skimming pricing strategy.