Entrepreneurship and Effective Small Business Management, 11e, Global Edition
(Scarborough)
Chapter 11 Pricing and Credit Strategies
1) Tom is working on a pricing strategy for his company’s new product line. In order to
determine the price ceiling for these products, Tom needs to know:
A) what price range will work best.
B) what his company’s cost structures are.
C) what his customers are willing to pay.
D) what his competitors are charging.
2) When pricing products, it is important to remember that:
A) there is an ideal price that customers will pay for a given product or service.
B) once the acceptable price range is found, prices should not be changed again.
C) pricing is more an intuitive than a quantitative process.
D) a customer orientation in price setting is most important.
3) Small business owners get into trouble when determining their price floor when they:
A) focus on what the customer will pay.
B) assume their costs are the same as their competitors’.
C) begin to track financial ratios to determine what they are doing.
D) use the price floor as the minimum price in their acceptable price range.
4) The final price set by the entrepreneur for the products depends on:
A) the desired image for the products.
B) the cost structure.
C) what customer will pay.
D) what competitors are charging.
5) When small manufacturing companies face rapidly increasing raw material costs, they can
adopt a number of strategies including:
A) pass the increasing costs along to their customers without comment.
B) absorb costs for the short term and plan for double price increases in the next pricing cycle.
C) reconsider their competitive strategy and seek a niche they can service.
D) emphasize the value their company provides customers.
6) ________ pricing strategy introduces a new product at a low price to gain quick acceptance
and extensive distribution in a mass market.
A) Penetration
B) Skimming
C) Discount
D) Sliding-down-the-demand-curve
7) ________ pricing policy is used to introduce a relatively low-priced good into a market where
no “elite segment” exists.
A) Penetration
B) Skimming
C) Discount
D) Sliding-down-the-demand-curve
8) The basic objective of a penetration pricing policy is to:
A) recover start-up costs as quickly as possible.
B) transform the small firm into a discount outlet.
C) gain quick access into a market to realize high sales volume quickly.
D) discourage competition and gradually become a high volume producer.
9) A new product ________ pricing strategy is often used in markets with little competition and
when the company seeks to recover start-up costs quickly.
A) penetration
B) skimming
C) discount
D) sliding-down-the-demand-curve
10) When using a skimming price strategy, small business owners should remember that:
A) it is difficult to correct pricing mistakes with this strategy.
B) it is a long-term policy and it will take time to see appropriate results.
C) if a price is set too low initially, it can be very hard to raise it later.
D) it is an excellent strategy for discouraging competitors from entering the market.
11) The ________ pricing strategy often reinforces the unique, prestigious image of a company.
A) penetration
B) introductory
C) discount
D) skimming
12) A ________ strategy works well when a company has a mature product, loyal customers, a
reputation for quality, and few competitors.
A) penetration
B) skimming
C) discount
D) price lining
13) The Omega Company introduces products with a higher-than-normal price in an effort to
quickly recover the initial developmental and promotional costs of the product. The Omega
Company is pursuing a ________ pricing strategy.
A) fixed-price
B) skimming
C) penetration
D) loss leader
14) When a retailer routinely prices goods at $9.97 and $7.36 rather than $10.00 and $7.50, the
retailer is using:
A) variable pricing.
B) penetration pricing.
C) odd pricing.
D) price skimming.
15) ________ is a technique which greatly simplifies the pricing function by setting the same
price for items with similar characteristics.
A) Odd pricing
B) Leader pricing
C) Price lining
D) Geographical pricing
16) When a small business practices price lining, it most commonly carries lined merchandise in
sets of ________ different ranges.
A) 2
B) 3
C) 4
D) 5
17) Jerry is developing a pricing strategy for an established line of home care products. His
premium products are priced over $4000, his best products are in the $2540 range, and his good
products are $1015 range. Jerry is using a ________ strategy.
A) penetration pricing
B) leader pricing
C) price lining
D) geographic pricing
18) ________ is a technique in which a small firm marks down the price of a popular item below
its normal price in an effort to increase customer traffic and to boost sales of other items.
A) Odd pricing
B) Leader pricing
C) Price lining
D) Suggested retail pricing
19) In ________ pricing, a type of geographical pricing, a small firm charges customers located
in different territories different prices for the same products.
A) FOB factory
B) uniform delivered
C) zone
D) price lining
20) Geographical pricing includes numerous techniques, such as:
A) uniform delivered pricing.
B) loss-leader pricing.
C) markdowns.
D) multiple pricing.
21) ________ is a pricing strategy under which local customers “subsidize” the shipping charges
the firm incurs when transporting merchandise to distant customers.
A) FOB factory pricing
B) Uniform delivered pricing
C) Zone pricing
D) Opportunistic pricing
22) Many small business owners use a ________ strategy to move stale, damaged, or slow
moving goods or to encourage shoppers to purchase merchandise before an upcoming season.
A) multiple pricing
B) opportunistic pricing
C) discount pricing
D) price lining
23) The Pastry Shop normally sells cheese Danishes for 60 cents each. On Mondays and
Tuesdays, its slowest days, The Pastry Shop offers cheese Danishes at “4 for $2.00.” This is:
A) price lining.
B) leader pricing.
C) multiple unit pricing.
D) odd pricing.
24) Baseball cards usually sell for 10 cents each. The Card Shop advertises them at “12 for
$1.00.” This is:
A) price lining.
B) leader pricing.
C) odd pricing.
D) multiple unit pricing.
25) When a computer manufacturer offers its computer with software pre-installed, a printer, and
Internet service, as all part of one price, the manufacturer is using a:
A) bundling strategy.
B) multiple pricing strategy.
C) suggested retail price strategy.
D) skimming pricing strategy.
26) When a small business owner doesn’t want to make a pricing decision, he/she can use a(n)
________ pricing strategy.
A) price lining
B) suggested retail
C) opportunistic
D) multiple unit
27) Probably the most important consideration a manufacturer has when setting the final price of
its new exclusive perfume is:
A) the perfume’s production cost.
B) competitor’s prices.
C) the image the company wants to create for the scent in the customer’s mind.
D) choosing between odd pricing and price lining.
28) Dotty has her competitors’ price information. Her most effective use of that information
would be to:
A) seek to match her competitors.
B) undercut competitors’ prices.
C) create a premium image by setting her prices higher than competitors.
D) use it as one variable in her pricing mix.
29) When considering the competition in price setting, the small business owner should:
A) consider the competitors’ location.
B) consider the competitors’ motives for their prices.
C) consider the nature of the goods being sold.
D) consider all of these.
30) Which of the following factors is vital to determining the effects of competition on the small
firm’s pricing policies?
A) The competitor’s location
B) The availability of capital for production
C) The form of ownership of the small business
D) The type of outlet the business is
31) When a small business is faced with price competition from a much larger competitor, it
should consider:
A) going head-to-head on prices by lowering its cost structure.
B) using non-price competition by offering value added service.
C) make rapid, continual price changes to keep the competition off balance.
D) move to a premium price strategy by offering higher scale goods and services.
32) If a haberdasher purchases a tie for $12 and plans to sell it for $18, the percentage of retail
price markup would be:
A) 33%.
B) 50%.
C) 175%.
D) 100%.
33) ________ is the average markup required on all merchandise to cover the cost of items,
incidental expenses, and a profit.
A) Initial markup
B) Cost plus markup
C) Direct markup
D) Contributing margin
34) If an item costs a small business owner $15, and the desired markup on it is 60%, its retail
price would be:
A) $24.00.
B) $25.00.
C) $37.50.
D) $43.25.
35) A common “me-too” pricing policy by which the small business owner establishes his/her
prices by monitoring competitor’s prices and then matching them is called:
A) follow-the-leader pricing.
B) below-market pricing.
C) price lining.
D) variable pricing.
36) The most commonly used pricing technique for manufacturers is:
A) direct pricing.
B) margin pricing.
C) cost-plus.
D) absorption pricing.
37) Absorption costing:
A) is complete pricing in that it takes into consideration all manufacturing and overhead costs.
B) guarantees the manufacturer a desired profit margin.
C) does not encourage a manufacturer to operate efficiently.
D) clouds the true relationship of price, volume, and costs.
38) Cost-plus pricing has several disadvantages, including:
A) it clouds the relationships among price, volume, and costs.
B) it fails to consider the competition sufficiently.
C) a mentality of “I-can-do-it-cheaper,” leading to price competition with larger companies.
D) it tends to be reactive rather than proactive in relation to competition and market forces.
39) 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, is called ________ costing.
A) absorption
B) break-even
C) direct
D) variable
40) ________ include(s) the unit cost of a manufacturer’s product under an absorption costing
system.
A) Opportunity costs
B) Depreciation
C) Insurance
D) Variable costs
41) ________ costing includes only those costs that vary directly with the volume of an item
produced.
A) Absorption
B) Break-even
C) Indirect
D) Direct
42) ________ tells what portion of the total revenues 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
43) Even in the short run, a small business must set the price of a product at least equal to the
________ costs (per unit), or it must shut down.
A) fixed
B) variable
C) total
D) invariable
44) Most service firms base their prices on:
A) fairly stable pricing policies.
B) the cost of the service plus an estimate of the value they add in delivering the service.
C) market surveys on their respective industries.
D) an hourly basis for services rendered.
45) To establish a reasonable, profitable price for service, the small business owner needs to
know:
A) fixed and variable costs, the break-even point, and his/her contribution percentage.
B) competitors’ prices, and costs of direct and indirect labor.
C) the cost of materials, direct labor, and overhead for each unit of service.
D) full-absorption costs, direct and indirect labor, and the break-even point.
46) A customer who purchases a television from Ace Appliance Store and pays for it in 36
monthly payments is using:
A) trade credit.
B) charge account credit.
C) installment credit.
D) debit card credit.
47) A firm sells small-ticket items to their regular customers on customer charge accounts and
then bills the customers each month. This type of credit arrangement is called:
A) trade credit.
B) charge account credit.
C) installment credit.
D) debit card credit.
48) A variation of geographic pricing in which the small company sells its merchandise to
customers on the condition that they pay all the shipping is called:
A) uniform delivered pricing.
B) F.O.B. factory.
C) zone pricing.
D) discounts.
49) F.O.B. factory is a variation of ________ pricing.
A) opportunistic
B) bundling
C) geographic
D) skimming
50) When developing a marketing approach to pricing, business owners must:
A) establish prices that are compatible with their customers’ expectations and what they are
willing to pay.
B) compete solely on price.
C) establish prices that are compatible with their customers’ expectations and add a certain
percentage to it.
D) establish prices that are compatible with their customers’ expectations and subtract a certain
percentage to it.
51) Price wars usually begin when:
A) the economy is in turmoil.
B) when there are more than 4 competitors.
C) when one competitor believes that they can achieve a higher volume through lower price.
D) small businesses enter the market dominated by bigger giants.
52) Customers that sell small-ticket items frequently offer their customers:
A) discounts.
B) installment credit option.
C) “store value” cards.
D) trade credit.
53) The price that business owners set depends on the desired image they want to create for their
products or services. These images are:
A) discount.
B) value.
C) upscale.
D) All of the above
54) Brenda is starting her business by offering exclusive hand-bags. The desired image that she
should set for her handbags is “exclusive.” She should set the price at:
A) discount.
B) bargain.
C) value.
D) upscale.
55) In most cases, a ________ pricing strategy is used to introduce relatively low priced goods
into the market where no elite segment and little opportunity for differentiation exist.
A) skimming
B) penetration
C) geographic
D) opportunistic
56) Uniform delivered pricing is a variation of:
A) opportunistic pricing.
B) leader pricing.
C) geographic pricing.
D) multiple pricing.
57) Which price strategy is mostly used for moving stale, outdated, damaged merchandise?
A) Markdown pricing
B) Multiple pricing
C) Bundling
D) Skimming
58) XYZ manufactures computer hardware. The marketing executives, in order to increase the
market share, forced a business to accept a suggested retail price and not to sell the items below
the stated price.
A) This practice violates the Sherman Antitrust Act.
B) There is no violation. According to a recent Supreme Court decision, this is fine.
C) This practice violates the Fair Price Protection Act.
D) As long as the manufacturer offers rebates, they can do whatever they want.
59) For some customers, a higher price equals:
A) higher quality.
B) greater perceived value.
C) uniqueness.
D) All of the above
60) Price ________ usually begin(s) when one competitor believes that they can achieve a higher
volume through lower price, or they believe that they can exert enough pressure on other
competitors’ profits to drive them out of business.
A) discounts
B) markdowns
C) wars
D) penetration
61) The problem with using ________ is that it clouds the true relationships among price,
volume, and costs by including fixed expenses in unit cost.
A) full-absorption costing
B) variable costing
C) contribution margin costing
D) break-even costing
62) Which of the following is correct?
A) Sales – variable costs – fixed costs = contribution margin
B) Total revenue – variable costs = contribution margin
C) Total revenue – fixed costs = contribution margin
D) Total revenue – profit = contribution margin
63) Which of the following is a fair definition of price?
A) In purely economic terms, price is the monetary value of a good or service.
B) Price is a measure of what a customer is required to give up to obtain a good or service.
C) None of the above
D) Both A and B
64) The price floor is established:
A) by the firm’s total cost.
B) by the consumers.
C) by the government.
D) None of the above