Chapter–by–chapter aids: Chapter 17
CHAPTER 17: PRICE SETTING IN THE BUSINESS WORLD
CHAPTER 17 – COMMENTS ON QUESTIONS AND PROBLEMS
17– 1. Many department stores have high costs due to the services offered. The high costs dictate
higher prices. At the higher prices, turnover is much slower than in a discount house.
Therefore, department stores get into a vicious cycle – prices are high so turnover is low and
17– 2.
$800.00
Retail Price
x.65
$520.00
Wholesale Price
x.80
$416.00
Manufacturer’s Selling Price
312.00
Manufacturer’s Factory Cost
104.00
Gross Margin
a. $416.00, $520.00
b.
price) selling (on 25%100
$416.00
$104.00 =×
17– 3. The purpose here is for the student to see that a larger profit can be earned with a smaller
markup – but more turnover – than might be earned with a higher markup but lower stock
Part IV
IV–17-2 Perreault, Cannon, & McCarthy
17– 5. This question can be answered with an illustration like Exhibit 17-6.
17– 6.
units 4,000
50
200–250
units) (in BEP ===
BEP (in dollars) = 4,000 units x $250/unit = $1,000,000
Expected Sales
$1,250,000
Fixed Costs
$ 200,000
Variable Costs (80% of $1,250,000)
1,000,000
Total Costs
1,200,000
Expected Profit
$ 50,000
If sales were forecast at $875,000, total variable costs would be $700,000 (.8 x $875,000).
Thus, although there would be an accounting loss of $25,000, the contribution to fixed costs of
17– 7. Theoretically, every customer has his own demand curve and it would be possible to treat each
customer as a separate target market and attempt to maximize profits for each customer. As a
practical matter, this would be complicated. To some extent, this extreme is exemplified in
“farmers'” or “flea” markets or in industrial markets where each customer is negotiated with and
especially those catering to consumer products markets – tend to aim at larger although still
somewhat homogeneous groups. This is done to make the whole problem of implementing
marketing plans feasible – but it does lead to some consumers obtaining a consumer surplus
17– 8. Both can be thought of as a form of promotion and may relieve some of the pressure on other
types of promotion. Some groups of customers come to recognize bait pricing, however, and
so it may attract only certain target markets. Leader pricing has more general appeal, but it
17– 9. See section “Additional Demand–Oriented Approaches for Setting Prices.” Whether a
psychological pricing policy makes sense depends on the attitudes of the potential target
market(s), and therefore, again, we are involved in an evaluation of whole strategies, not just
17-10. The comments for Question 17-9 apply here also.
17-11. A prestige pricing policy could only be used if the product were suitable. If so, the promotion
might emphasize the prestige element, e.g., more distinguished. Exclusive distribution would
not be necessary, but selective distribution might be desirable (for other than convenience
17-12. Retailers, for example grocery stores, may use full–line pricing when they attempt to create an
image of competitive or perhaps low prices through attractive price cuts on certain items. Full–
line pricing is important if consumers normally buy several of the company’s products and
consider the “average price” of the firm’s offering – rather than the price of particular items. It is
also used to cater to the several markets for a general product class – offering several
products at different prices. This may be especially important for satisfying those who judge
quality on the basis of price. Full–line pricing is also important in those situations where fixed
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter–by–chapter aids: Chapter 17
Instructor’s Manual to Accompany Essentials of Marketing IV–17-3
costs are high and there is no reliable way of allocating them. In such situations, to reach the
company’s profit objective, it may want to price some items very low to meet the price–oriented
competition, and price others higher (where there is less competition).
DISCUSSION OF COMPUTER-AIDED PROBLEM 17: BREAK-EVEN/PROFIT
ANALYSIS
In this problem, the student gets hands–on experience with break–even analysis and profitability analysis.
The problem highlights how the sales quantity to break even (or reach the target profit) varies as price,
fixed costs, and variable costs change. Sensitivity analysis reveals to the student what happens to profit
with quantity changes above and below the break–even point.
The initial spreadsheet for the problem appears below:
P L U S – Spreadsheet
Break–Even
Profit Anal.
Total Fixed Costs
30000.00
*
30000.00
*
Assumed Selling Price
1.20
*
1.20
*
Average Variable Cost
0.80
*
0.80
*
Target Profit
0.00
10000.00
*
YOUR Estimate of Sales Quantity
80000
*
Unit Fixed Cost Contribution
0.40
0.40
AT BREAK–EVEN (OR TARGET PROFIT):
Needed Sales (Units)
75000
100000
Needed Sales (Dollars)
90000.00
120000.00
Total Costs
90000.00
110000.00
Average Cost Per Unit
1.20
1.10
AT YOUR ESTIMATE OF SALES QUANTITY
Revenue at Your Quantity
96000.00
Total Cost at Your Quantity
94000.00
Average Cost/Unit at Your Quantity
1.17
Profit at Your Quantity
2000.00
Answers to Computer–Aided Problem 17:
a. The What If data display below produces the requested table – and highlights the big change in the
break–even point (in units and dollars) at different price levels. However, the instructor may want to
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Part IV
P L U S – What If Data Display
–Break–Even –
Assumed
Selling Price
–Break–Even –
Needed Units
–Break–Even –
Needed Sales
1.00
150000
150000.00
1.04
125000
130000.00
1.08
107143
115714.44
1.12
93750
105000.00
1.16
83333
96666.28
1.20
75000
90000.00
1.24
68182
84545.68
1.28
62500
80000.00
1.32
57692
76153.44
1.36
53571
72856.56
1.40
50000
70000.00
b. A target profit of $15,000 would require unit sales of 112,500 units. The total cost will be $120,000
and the total sales dollars will be $135,000. The details appear in the spreadsheet scenario below:
P L U S – Spreadsheet
Break–Even
Profit Anal.
Total Fixed Costs
30000.00
*
30000.00
*
Assumed Selling Price
1.20
*
1.20
*
Average Variable Cost
0.80
*
0.80
*
Target Profit
0.00
15000.00
*
YOUR Estimate of Sales Quantity
80000
*
Unit Fixed Cost Contribution
0.40
0.40
AT BREAK–EVEN (OR TARGET PROFIT):
Needed Sales (Units)
75000
112500
Needed Sales (Dollars)
90000.00
135000.00
Total Costs
90000.00
120000.00
Average Cost Per Unit
1.20
1.07
AT YOUR ESTIMATE OF SALES QUANTITY
Revenue at Your Quantity
96000.00
Total Cost at Your Quantity
94000.00
Average Cost/Unit at Your Quantity
1.17
Profit at Your Quantity
2000.00
c. The What If data display below provides the requested table.
Chapter–by–chapter aids: Chapter 17
Part IV
having the store nearby is very important to low–income, inner–city consumers who have to rely on public
transportation. It’s hard for them to shop around, and thus they are less price sensitive. Research
indicates that these stores can charge prices that are 5 percent higher on average with little effect on
sales volume. This would significantly increase profitability. Do you think the chain should charge higher
prices at its inner–city stores? If the manager of the store decided to set higher prices on some products
and leave others unchanged—to result in an overall average increase of 5 percent—what products would
Ultimately, the retail chains have a responsibility to their customers and also to their shareholders. Many
students will not think about the fact that if low prices are charged in stores with higher costs that
customers in other areas will have to pay more than what their food should cost. Some students might
argue that it is ok for those who are better off to pay more (as a matter of social equity). But, in the end,
that line of thinking can hurt everyone. The reason is that retailers face competition in each local market.
If one retailer tries to make up for low profits in one market area by raising prices in another market area,
To what extent does it matter if the higher prices reflect the higher costs as compared to the lower price
sensitivity? To keep a balanced perspective on the discussion, the instructor might ask – “What if the
higher cost to serve was only 3% – but prices are increased 5%. Is this ethical?”
The scenario also outlines the possibility of cross–subsidizing within stores. For example, some students
may argue that some staples – perhaps bread and milk – should not have higher prices. The lower profit
The potential for negative publicity raises another dimension. The “TV Test” (explained earlier in the
overview as one of three guidelines for ethical decision making) is explicit in this scenario. It certainly
raises the stakes for decision makers and forces them to be sure they understand and are comfortable
with the logic underlying the strategy. However, it also highlights the shortcoming of the “TV Test.” Some
topics are not easy to explain in a 30–second “sound bite” on the news. Managers need to make
decisions that they can defend and that will pass muster with scrutiny (by the public), but in tough
An individual firm in a market–directed economy has no responsibility for the macro problems of poverty,
income distribution, and the sociology of the inner city. In our economic system, these problems have
been assigned to government and to non–governmental charitable organizations. Still, some business
organizations are increasingly addressing broader social issues in the communities they serve. These
companies may feel beholden to the triple bottom line – people, the planet, and profit. These issues are
Chapter–by–chapter aids: Chapter 17
The Marketing Plan Coach software on the text website includes a sample marketing plan for Hillside
Veterinary Clinic. Look through the “Marketing Strategy” section.
a. A veterinary clinic must have some system for dealing with emergencies that occur on weekends
and at night when the clinic is closed. Individual vets usually rotate so that someone is always on
call to handle emergencies. The price for emergency care is usually 50 percent higher than the
price for care during normal hours. Do you think that Hillside should charge higher prices for
HVC may want to charge a premium for emergency services that occur at times when the clinic is not
open. This is especially important at a clinic like HVC, where there is only one vet – and she is already
working long hours. Such a policy encourages customers to discern if an emergency warrants the
additional expense. Clearly, there are many situations where the value of emergency services for a
customer can be quite high. Under these conditions, customers should be willing to pay a premium.
The b questions allow for discussion of demand–oriented pricing issues, including value, price sensitivity,
reference prices, price–quality relationships, and competitor prices. Owners of pedigree animals may very
well be less price sensitive – and place greater value on pet care. However, consider reference prices
before charging these owners more. Reference prices may come from competitors – that typically do not
provide such premiums – or from HVC’s own price list. The premium prices may also make owners of
non–pedigree animals wonder if they are getting inferior service – or make customers wonder if the clinic
Part IV