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65) It is much easier to lower a product's price once it is on the market than to increase it after its
introduction.
66) Leader pricing is a technique in which a small company marks down the price of a popular
item below its normal price in an attempt to increase customer traffic and to boost sales of other
items.
67) Captive-product pricing is a technique that involves selling a product for a low price and
charging a higher price for the accessories that accompany it.
68) The manufacturer's suggested price takes into account the small firm's cost structure and its
competitive situation.
69) The manufacturer's suggested retail prices may create an undesirable image for the small
firm.
70) A manufacturer can force a small business to charge the "manufacturer's suggested retail
price."
71) When a small business owner does not want to make a pricing decision, he can use a
suggested retail pricing strategy.
72) The best pricing strategy for a small business owner to follow is to charge the manufacturer's
suggested retail price.
73) Name and explain the three basic pricing strategies a small business owner has in
establishing a new product's price.
74) Describe two situations — one where you consider dynamic pricing is ethical and the other
where dynamic pricing is unethical.
75) There are at least eight different pricing strategies for established goods and services.
Explain four of those strategies and under what conditions a business owner should use them.
76) ________ is the difference between the cost of a product or service and its selling price.
A) Markup
B) Break-even price
C) Contribution margin
D) Absorption costing
77) Macy's buys white, pinpoint oxford blouses at $14 each and sells them at $30 each. Macy's
percentage (of cost) markup is ________ percent.
A) 46.7
B) 87.5
C) 53.3
D) 114.3
78) Macy's buys white, pinpoint oxford blouses at $14 each and sells them at $30 each. Macy's
percentage (of retail price) markup is ________ percent.
A) 46.7
B) 87.5
C) 53.3
D) 114.3
79) The Sound Shop buys a popular programmable telephone from a supplier for $12.19. If the
desired markup of retail price on the telephone is 35 percent, the retail price should be ________.
A) $34.83
B) $18.75
C) $16.46
D) $20.11
80) Most stores find it most practical to use a flexible markup, which assigns various markup
percentages to different types of products.
81) Below-market pricing strategies can be risky for small companies because they require
businesses to constantly achieve high sales volume to remain competitive.
82) Even though cost-plus pricing is simple, it does not encourage a small business to use its
resources efficiently.
83) The average credit card holder in the United States has 3.75 credit cards.
84) The interchange fee is a bank charge that retailers pay whenever customers use a credit or a
debit card to pay for a purchase.
85) The use of credit cards increases the probability, speed, and magnitude of customer
spending.
86) Because installment credit absorbs a company's cash, many small businesses rely on
financial institutions to provide it for their customers.
87) Which of the following is/are true regarding cost-plus pricing?
A) It encourages the manufacturer to operate efficiently.
B) It fails to consider competitors' prices appropriately.
C) It fails to guarantee the manufacturer a desired profit margin.
D) A and C only.
88) A reliable cost accounting system is necessary for accurate pricing. The traditional method of
product costing, where the costs of direct materials, direct labor, and factory overhead are
included in a finished product's total cost is called ________.
A) absorption costing
B) break-even pricing
C) direct costing
D) absorption pricing
89) Pandecker, Inc., estimates the variable costs of producing one unit to be $11.26. The
company plans to produce 26,500 units. The fixed costs the company expects to incur are
$82,770. If Pandecker's profit target is $75,000, what price should it charge?
A) $14.38
B) $35.17
C) $17.21
D) $11.26
90) ________ tells what portion of the total revenue remains, after covering variable costs, to
contribute toward meeting fixed expenses and earning a profit.
A) The full absorption statement
B) The break-even selling price
C) The contribution percentage
D) Cost-plus pricing
91) Pandecker, Inc., estimates the variable costs of producing one unit to be $11.26. The
company plans to produce 26,500 units. The fixed costs the company expects to incur are
$82,770. What is Pandecker's break-even selling price?
A) $14.38
B) $35.17
C) $11.26
D) $3.12
92) For setting prices, full absorption financial statements are much more useful to the small
business owner than are direct cost statements.
93) Direct (variable) costing includes in the unit cost of a product only those costs that vary with
the quantity of units produced.
94) One advantage of installment loans for a small business is that the business owner retains a
security interest in the item sold as collateral on the loan.
95) A small business must carefully assess its own cash position before offering trade credit to its
customers.
Mini-Case 11-1: Pricing for Profit
Miller Manufacturing, Inc., produces electronic components for television circuitry. Variable
costs comprise 67 percent of the product's selling price. The variable costs of producing a
component include:
Direct material $1.83/unit
Direct labor $6.72/unit
Variable factory overhead $ .86/unit
Vicki Miller, President, expects to produce 80,000 electronic components and to incur $280,000
of fixed costs.
96) If Miller desires a profit of $120,000, what price should she set?
97) What is Miller Manufacturing's break-even price?
98) What is the minimum price that Miller Manufacturing should set for its electrical
components?
99) Which of the following is/are not true regarding pricing for service firms?
A) A service firm must establish a price based on the materials used to provide the service, the
labor employed, an allowance for overhead, and a profit.
B) Most service firms base their prices on an hourly rate (usually actual hours), but sometimes
standard hours are used.
C) For most service firms, labor and profit comprise the largest portion of the cost of the service.
D) None of the above
100) Markup is the difference between the cost of a product or service and its selling price.
101) Break-even pricing will determine the price that will cover total fixed and variable costs
and generate a reasonable profit.
102) Because the manufacturer's capacity in the short run is fixed, pricing decisions should be
aimed at employing these resources most efficiently.
103) For most service firms, labor and profit comprise the greatest portion of the cost of the
service.
104) Explain the difference between absorption costing and variable (or direct) costing. Which
one is more useful when establishing prices? Why?
Mini-Case 11-2: The Price is Right?
"It is obvious what people want; I can't imagine why someone never thought of it before. What
good is it to be wealthy if I have to stay around the house all day waiting for service
representatives or doing paperwork?" Penny Matthews decided she would take those
responsibilities off the backs of the people of Tucson, Arizona. "My business will arrange for all
the services you need around the home (lawn mowing, plumbing, carpets cleaning, televisions
repairs, pools cleaning, everything). My clients will be free to enjoy their lives without worrying
about their houses. We will also arrange for parties to be completely catered. In addition, if you
wish, we will pay all your bills and reconcile your bank statement. A life without the irritations
of domestic hassles; that's our service."
Penny was explaining the idea to her close friend and banker, Wallace Trevillian. "You have
definitely thought about this for some time and put months of work into its planning," said
Wallace. "What do you plan to charge for these services?"
"That's a good question, Wallace. I haven't thought about it."
105) How would Penny Matthews go about determining how to price the services her business
plans to offer?
106) It has been reported that the use of credit cards increases the ________ of customer
spending.
A) probability
B) speed
C) magnitude
D) All of the above
107) Small companies have the following three options for selling to customers on credit:
________.
A) credit cards, manufacturer credit, and trade credit
B) credit cards, installment credit, and trade credit
C) credit cards, installment credit, and poor credit
D) debit cards, installment credit, and trade credit
108) The fee that banks collect from retailers whenever customers use a credit or a debit card to
pay for a purchase is known as the ________ fee.
A) interchange
B) chargeback
C) processing
D) installment
109) The use of credit cards by consumers ________.
A) has little real impact on sales
B) broadens a small company's customer base
C) costs businesses nothing and adds significantly to their sales
D) has no impact on pricing decisions
110) A customer who purchases a television from Ace Appliance Store and pays for it in 36
monthly payments is most likely using ________ credit.
A) trade
B) charge account
C) installment
D) debit card
111) One of the requirements to be able to offer ________ credit is to make certain that the
firms' cash position is ________.
A) installment; positive
B) installment; strong enough to support the additional pressure
C) trade; positive
D) trade; strong enough to support the additional pressure
112) Which of the following businesses would be most likely to offer installment credit to its
customers?
A) A retailer of major appliances
B) A convenience store
C) A printer
D) A clothing retailer
113) Explain the different kinds of credit a small business can offer its customers and the impact
each has on pricing.
114) Explain the advantages and the disadvantages of a small business accepting credit cards for
customer purchases.
