Chapter–by–chapter aids: Chapter 16
P L U S – SpreadSheet
Situation
Cash Discount Percent
2.00
*
Days to Pay to Get Cash Discount
10
*
Days to Pay Net Invoice Value
30
*
*
Number of Customers
*
*
Net Sales (Gross Sales Minus Cash Discounts)
Ratio of Total Discounts to Total Face Value
This table compares 2/10 with the current 3/10 situation.
Comparison
New: 2/10, net 30
Approximate Effective Interest Rate
36.50
Total Invoice (Gross Sales)
99,000
Total Monthly Cash Discount
1,188
Net Sales Receipts
97,812
CHAPTER 16 – COMMENTS ON USE OF SUGGESTED CASES WITH THIS
CHAPTER
Case 13: AAA Office World.
Case 25: Long Beach Plastics Mfg.
This case provides an opportunity to discuss geographic pricing policies in an oligopolistic market – that is
broken down into oligopoly submarkets (or even “geographic monopolies”) that have tended to avoid
price cutting. Now, one of the oligopolists is thinking about changing its geographic pricing policies. See
case discussion.
CHAPTER 16 – COMMENTS ON USE OF ETHICS QUESTION WITH THIS CHAPTER
Situation: A pricing consultant has suggested that your firm set a premium price for the paper shredding
Part IV
IV–16-8 Perreault, Cannon, & McCarthy
executives who rack up frequent–flier miles on business trips and then use the free tickets they get for
family vacations.” Your boss has left the decision up to you. Would you follow the consultant’s advice?
Why or why not?
In recent years there has been a lot of criticism of the use of rebates. But, most of the criticisms have
focused on (1) failure by firms to pay the rebates as promised or (2) the fact that rebates often motivate
consumers to buy (because the price after the rebate is low) but then consumers fail to apply for the
refund. Both of those topics have ethical ramifications that can be discussed, but that is not the focus of
this scenario.
CHAPTER 16 – COMMENTS ON USE OF CREATING MARKETING PLANS
QUESTION WITH THIS CHAPTER
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 located in another town gives its customers a 10 percent discount on their next
vet bill if they refer a new pet owner to the clinic. Do you think that this would be a good idea for
Hillside? Does it fit with Hillside’s strategy?
b. The same clinic offered customers a sort of cumulative discount – an end–of–year refund if their
total spending exceeded a certain level. That clinic sees it as a way of being nice to people
whose pets have had a lot of problems. Do you think that this is a good idea for Hillside? Why or
why not?
Chapter–by–chapter aids: Chapter 16
CHAPTER 16 – SUMMARY OF CONNECT HOMEWORK EXERCISES
Exercise 16.1: Pricing and Legislation
Question Type: Drag–and–drop
Exercise 16.2: Pricing Objectives
Question Type: Drag–and–drop
Exercise 16.3: The A.I. Root Company – part 1
Question Type: Video case
Chapter–by–chapter aids: Chapter 16
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. But also – at the higher
prices – the 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 therefore costs are high,
causing prices to be set high, etc.
17– 2.
$800.00
Retail Price
x.65
x.80
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
turnover. Students will use a variety of examples. But, the following answer provided by one
student gives you an idea of what to expect in a careful answer:
$375.00 – or 25/350 = 7 percent more than the traditional retailer.
17– 4
20,000
Units
10,000
Units
Total Fixed Costs
$200,000
$200,000
Total Variable Costs
$100,000
50,000
Total Costs
$300,000
$250,000
$15.00
$25.00
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
200,000
200–250
200,000
units) (in BEP ===
BEP (in dollars) = 4,000 units x $250/unit = $1,000,000
Expected Sales
$1,250,000
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 approached in
“farmers'” or “flea” markets or in industrial markets where each customer is negotiated with and
a separate price set for each transaction. In most U.S. markets, however, there is a possibility
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
may be especially effective for “economic shoppers.”
17– 9. See section “Additional Demand–Oriented Approaches for Setting Prices.” Whether a
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
products) to be sure that the place fits with the prestige image of the product.
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 by attractive price cuts on certain items. Full–line
Chapter–by–chapter aids: Chapter 17
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 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
*
0.40
0.40
AT BREAK–EVEN (OR TARGET PROFIT):
90000.00
90000.00
1.20
1.10
AT YOUR ESTIMATE OF SALES QUANTITY
96000.00
94000.00
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
draw on this analysis to highlight the fact that the quantity that customers will actually buy at any
given price is a different matter – and might result in a big loss or a big profit. Break–even analysis
Part IV
IV–17-4 Perreault, Cannon, & McCarthy
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
1.12
105000.00
1.16
1.20
1.24
1.28
1.32
1.36
1.40
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 analysis 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
*
0.40
0.40
AT BREAK–EVEN (OR TARGET PROFIT):
90000.00
90000.00
AT YOUR ESTIMATE OF SALES QUANTITY
96000.00
94000.00
1.17
2000.00
c. The What If data display below provides the requested table.
Average cost per unit decreases constantly as the sales quantity increases. This is because the
fixed portion of total cost is spread across more units.
Chapter–by–chapter aids: Chapter 17
P L U S – What If Data Display
–Profit Anal.–
YOUR Estimate
of Sales
–Profit Anal.–
Tot. Cost @
Your Qty
–Profit Anal.–
Avg. Cost/Unit
@ Your Qty
–Profit Anal.–
Profit @ Your
Quantity
64000
81200.00
1.27
–4400.00
67200
83760.00
1.25
–3120.00
70400
86320.00
1.23
–1840.00
73600
88880.00
1.21
76800
91440.00
1.19
80000
94000.00
1.17
2000.00
83200
96560.00
1.16
3280.00
86400
99120.00
1.15
4560.00
89600
1.13
5840.00
92800
1.12
7120.00
96000
1.11
8400.00
CHAPTER 17 – COMMENTS ON USE OF SUGGESTED CASES WITH THIS
CHAPTER
Case 17: Simply Pure H2O4U
This case can be used here to illustrate how break–even analysis can be used to evaluate various
strategy alternatives – in this situation a possible move to a new location. See case discussion in Part V.
Case 24: Wireway
Case 27: Advanced Molding, Inc.
This case can be used to illustrate that different price level policies should be part of different strategies.
The company will probably have to meet competition in the almost purely competitive components
Case 35: Rizzuto’s Pizzeria
This case provides lots of “numbers” to analyze—to give some practice in comparing alternatives using
sales and costs estimates. See case discussion in Part V.
CHAPTER 17 – COMMENTS ON USE OF ETHICS QUESTION WITH THIS CHAPTER
Situation: You are a pricing specialist for a large grocery store chain that has always charged the same
prices in all of its stores. However, average operating costs are higher for its inner–city stores. In addition,
Part IV
IV–17-6 Perreault, Cannon, & McCarthy
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
you recommend for higher prices? Why? If prices were increased and antipoverty activists got TV
coverage by picketing the chain, how would you respond to a TV reporter covering the story?
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
margins on these products could be offset by higher margin on other products. Grocery stores typically
make such adjustments as part of their pricing strategy. But what are the ethical implications in this
scenario?
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
discussed in more detail in the final chapter of the text.
Chapter–by–chapter aids: Chapter 17
CHAPTER 17 – COMMENTS ON USE OF CREATING MARKETING PLANS
QUESTION WITH THIS CHAPTER
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
emergency care? Does it fit with Hillside’s strategy?
b. Some customers have expensive pedigree dogs and cats and are less price sensitive than others
about fees for veterinary care. Do you think that it would be possible for Hillside to charge higher
prices in caring for expensive pets? Why or why not?
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, the possibility of
CHAPTER 17 – SUMMARY OF CONNECT HOMEWORK EXERCISES
Exercise 17.1: The A.I. Root Company – part 2
Question Type: Video case
Exercise 17.2: Break–even Analysis
Question Type: Comprehension case
Exercise 17.3: Tru–Pic Pricing
Question Type: Comprehension case
IV–17-8 Perreault, Cannon, & McCarthy
Exercise 17.4: Demand–Oriented Pricing
Question Type: Drag–and–drop
Chapter–by–chapter aids: Chapter 18
CHAPTER 18: IMPLEMENTING AND CONTROLLING MARKETING
PLANS: EVOLUTION AND REVOLUTION
CHAPTER 18 – COMMENTS ON QUESTIONS AND PROBLEMS
18– 1. Student answers to this question will vary. The purpose is to prompt them to think about how
firms use technology to improve implementation. Many consumers never think about this,
18– 2. Clearly, it is not wise to leave it to the computer experts to develop the reports. The manager
should be able to add value in discussions about what should be on the reports because it is
18– 3. Clearly, there are hundreds of examples of firms that do a good job with implementation.
However, students are likely to focus on firms in the local market. Class discussion will add
the most value with this question when the instructor can “probe” students to go into more
detail about what a firm does. Students will often describe some aspect of what the firm does
in general terms, but often they can go into more detail when asked specific questions. The
purpose of the questions is to get students thinking about all of the hundreds of ways that firms
can work to do a better job implementing their strategies.
18– 4. See section “Sales Analysis Shows What’s Happening.” Specifically:
a. A geographic sales breakdown might reveal that the product was slipping in one part of
the country, before the situation became general. A comparison of sales to projected
sales for swim suits, for example, might reveal early in the season that the product was
not being received favorably in the South and Southwest – and that some changes in the
marketing mix were desirable.
Part IV
IV–18-2 Perreault, Cannon, & McCarthy
18– 5. The major difference is that performance indexes are developed in performance analysis – to
compare what actually happens against the “what ought to have happened.” See section
“Performance Analysis Looks for Differences.”
18– 6. The iceberg principle suggests that almost any summary data may have much variation hidden
18– 7. This question helps make the point that marketing management should look at much more
than just sales when attempting to evaluate strategies. Both sales and cost and performance
analyses may be helpful in evaluating alternative strategies.
18– 8. Variations of 5 to 10 percent (or perhaps more) from quotas are to be expected but they should
not be ignored. Rather, analysis of the data may indicate why the sales forecast was in error –
and how the marketing mix might be adjusted to improve the situation. Even if sales are above
forecasted level, analyses should be run. Management ought to know whether it was just luck
or random variations – or whether the firm was doing something positive which could be used
elsewhere with the present product or other products.
18– 9. Controversy seems to occur because the supporters of each approach tend to ignore the
points of view of those holding the other approach. Both points of view have merit and
appropriate places for use.
18–10. No. A $500 contribution to fixed costs and profit ($900 fixed cost – $400 loss = $500) would be
lost (company profits would be cut by this amount) if these customers were dropped.
18–11. The need for marketing audits seems to be growing now that product life cycles are
accelerating and the marketplace is becoming even more competitive. Marketing managers
tend to get bogged down in operating details – and are not able to spend the time they should
Chapter–by–chapter aids: Chapter 18
DISCUSSION OF COMPUTER-AIDED PROBLEM 18: MARKETING COST
ANALYSIS
This problem highlights the differences between the full–cost approach and the contribution–margin
approach – and why the differences can result in conflicts among managers. The student uses both
approaches to analyze the data for a firm that sells two products. The analysis reveals the difficulties that
arise in the full–cost approach when one product sells much better than the other – and therefore gets
allocated a much larger share of the costs.
The initial spreadsheet for this problem is as follows:
P L U S – SpreadSheet
Full–Cost
Cont.–Margin
PRODUCT A: Selling Price
10.00
*
10.00
*
Unit Cost-A
2.00
*
2.00
*
Unit Sales Commission
2.00
*
2.00
*
Quantity Sold-A
*
*
Contribution–Margin-A
30000.00
Administrative Expense
16891.89
Advertising Expense
4729.73
PRODUCT B: Selling Price
6.00
*
6.00
*
Unit Cost-B
2.00
*
2.00
*
Unit Sales Commission
1.00
*
1.00
*
Quantity Sold-B
*
*
Contribution–Margin
12000.00
Administrative Expense
8108.11
Advertising Expense
2270.27
Net Profit or Loss
1621.62
Total Revenue
74000.00
74000.00
Total Administrative Cost
25000.00
25000.00
Total Advertising Cost
7000.00
7000.00
Total Variable Expense
32000.00
32000.00
Total Profit or Loss
10000.00
10000.00
Answers to Computer–Aided Problem 18:
Part IV
IV–18-4 Perreault, Cannon, & McCarthy
At the same time, the allocated administrative expense for Product B decreases from $8,108.11 (see
initial spreadsheet) to $7,142.86. This is a decrease of $965.25. Thus, expense is “subtracted” from
Product B and added to Product A.
Volume of A
Allocated to A
Allocated to B
5,000
16,891.89
8,108.11
P L U S – SpreadSheet
Full–Cost
Cont.–Margin
PRODUCT A: Selling Price
10.00
*
10.00
*
Unit Cost-A
2.00
*
2.00
*
Unit Sales Commission
2.00
*
2.00
*
Quantity Sold-A
6000
*
5000
*
Contribution–Margin-A
30000.00
Administrative Expense
17857.14
Advertising Expense
5000.00
Net Profit or Loss-A
13142.86
PRODUCT B: Selling Price
6.00
*
6.00
*
Unit Cost-B
2.00
*
2.00
*
Unit Sales Commission
1.00
*
1.00
*
Quantity Sold-B
4000
*
4000
*
Contribution–Margin
12000.00
Administrative Expense
7142.86
Advertising Expense
2000.00
Net Profit or Loss
Total Revenue
84000.00
74000.00
Total Administrative Cost
25000.00
25000.00
Total Advertising Cost
7000.00
7000.00
Total Variable Expense
36000.00
32000.00
Total Profit or Loss
16000.00
10000.00
b. If Tapco stopped selling Product A, total profits would drop $30,000 – resulting in a $20,000 loss!
Chapter–by–chapter aids: Chapter 18
P L U S – SpreadSheet
Full–Cost
Cont.–Margin
PRODUCT A: Selling Price
10.00
*
10.00
*
Unit Cost-A
2.00
*
2.00
*
Unit Sales Commission
2.00
*
2.00
*
Quantity Sold-A
0
*
0
*
Contribution–Margin-A
0.00
Administrative Expense
0.00
Advertising Expense
0.00
Net Profit or Loss-A
0.00
PRODUCT B: Selling Price
6.00
*
6.00
*
Unit Cost-B
2.00
*
2.00
*
Unit Sales Commission
1.00
*
1.00
*
Quantity Sold-B
4000
*
*
Contribution–Margin
12000.00
Administrative Expense
2500.00
Advertising Expense
Net Profit or Loss
Total Revenue
24000.00
24000.00
Total Administrative Cost
25000.00
25000.00
Total Advertising Cost
7000.00
7000.00
Total Variable Expense
12000.00
12000.00
Total Profit or Loss
The next spreadsheet is for the case if Tapco stops selling Product B.
P L U S – SpreadSheet
Full–Cost
Cont.–Margin
PRODUCT A: Selling Price
10.00
*
10.00
*
Unit Cost-A
2.00
*
2.00
*
Unit Sales Commission
2.00
*
2.00
*
Quantity Sold-A
5000
*
5000
*
Contribution–Margin-A
30000.00
Administrative Expense
25000.00
Advertising Expense
7000.00
Net Profit or Loss-A
–2000.00
PRODUCT B: Selling Price
6.00
*
6.00
*
Unit Cost-B
*
*
Unit Sales Commission
1.00
*
1.00
*
Quantity Sold-B
*
*
Contribution–Margin
0.00
Administrative Expense
0.00
Advertising Expense
0.00
Net Profit or Loss
0.00
Total Revenue
50000.00
50000.00
Total Administrative Cost
25000.00
25000.00
Total Advertising Cost
7000.00
7000.00
Total Variable Expense
20000.00
20000.00
Part IV
IV–18-6 Perreault, Cannon, & McCarthy
c. The firm would need to sell 5,250 units of Product A at $12.00 each to make as much profit ($10,000,
as shown on the initial spreadsheet) as it was making with both products.
The What If data display for this analysis is presented below:
P L U S – What If Data Display
–Full–Cost–
Quantity
Sold-A
–Full–Cost–
Profit-A
–Full–Cost–
Total Profit
or Loss
5200
9600.00
9600.00
5210
9680.00
9680.00
5220
9760.00
9760.00
5230
9840.00
9840.00
5240
9920.00
9920.00
5250
10000.00
5260
10080.00
5280
10240.00
5290
10320.00
5300
10400.00
CHAPTER 18 – COMMENTS ON USE OF SUGGESTED CASES WITH THIS
CHAPTER
Case 12: DrJane.com—Custom Vitamins
This case provides a fairly detailed analysis of the potential costs of bad customer service. The case also
Case 33: Kennedy & Gaffney
Case 35: Rizzuto’s Pizzeria
This case provides lots of “numbers” to analyze – to give some practice in comparing alternatives using
sales and costs estimates. See case discussion.
Video Case 6: Big Brothers and Big Sisters of America
The video explores the processes by which Big Brothers Big Sisters of America (BBBSA) developed and
Chapter–by–chapter aids: Chapter 18
CHAPTER 18 – COMMENTS ON USE OF ETHICS QUESTION WITH THIS CHAPTER
Situation: You are the marketing manager for a regional insurance company that specializes in auto
insurance. You ask a summer intern to come up with a performance analysis to compare how profitable
customers are based on where they live, the cost of their policies, and their past claims. It turns out that
inner–city customers are the least profitable; the company actually loses money on many of them.
Currently, telephone salespeople from your office are calling leads from a direct–mail ad campaign—and
they are having success selling policies. Your bonus and the sales reps’ commissions are based on
sales of new policies, not on costs or customer profitability. What should you do in response to the
information from the profitability analysis conducted by the summer intern? Should you change your
marketing strategy? Should you tell salespeople not to call prospects from inner city addresses? Explain
your thinking.
The situation outlined in this scenario often happens as firms conduct customer profitability analysis.
Companies may find that some key customers or certain target markets are unprofitable. And incentive
CHAPTER 18 – COMMENTS ON USE OF CREATING MARKETING PLANS
QUESTION WITH THIS CHAPTER
The Marketing Plan Coach software on the text Web site includes a sample marketing plan for Hillside
Veterinary Clinic. Look through the “Implementation” section.
a. Does the plan say anything about how Hillside will handle complaints? What could Hillside do in
this area?
b. How could Hillside break down its sales and performance analysis? What type of analysis would
you recommend? How could this be used to provide control for the marketing plan?
c. What type of cost analysis should Hillside do? How could this be used to provide control of the
marketing plan?
The marketing plan does not provide specific recommendations for managing complaints. An instructor
might ask students why they are not included – and whether they should be. This level of detail may or
Part IV
IV–18-8 Perreault, Cannon, & McCarthy
analysis looks for exceptions or variations as compared to plans and may also give insight about the
profitability of particular services or perhaps types of patients (animal). Dr. Hardy might develop specific
sales targets for each service – and then see how sales compare to the plan.
CHAPTER 18 – SUMMARY OF CONNECT HOMEWORK EXERCISES
Exercise 18.1: Sales and Performance Analysis
Question Type: Drag–and–drop
Exercise 18.2: Marketing Cost Analysis
Question Type: Comprehension case