Refer to the scenario below to answer the following questions.   

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Alden Manufacturing produces small kitchen appliancesblenders, hand mixers, and electric skilletsunder the brand name First Generation. Alden attempts to target newlyweds and first-time home buyers with this brand.           

In considering that most young households have limited financial resources, Alden has attempted to engage in target costing. "In doing this," Milt Alden stated, "we have better control over keeping price right in line with customers."     

Alden manufactures a three-speed blender, its top seller, and a five-speed blender. The hand mixers are manufactured in two stylesa small hand-held mixer with two rotating beaters and a similar style that comes with an optional stand and attached mixing bowl. Alden's temperature-controlled skillets are manufactured in one style with three color options.    

"Our product offerings are narrower," Milt Alden added, "but our line workers know each product like the back of their hands. This allows us to produce superior products while holding our prices low."

98) Milt Alden says that his line workers "know each product like the back of their hands," and that this knowledge helps the company keep its prices low. This indicates that Alden Manufacturing most likely uses which of the following strategies?

A) cost-plus pricing

B) value-based pricing

C) the experience curve

D) cost-based pricing

E) target profit pricing

Answer: C

Diff: 2        Page Ref: 296

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

99) Milt Alden uses a target costing strategy. Which of the following is he most likely to do in executing this strategy?

A) base his price on competitors' prices

B) use everyday low pricing

C) use a break-even chart to determine pricing

D) start with customer-value considerations

E) start by determining the costs of a new product

Answer: D

Diff: 2        Page Ref: 300

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

100) If Alden raises the price on the handheld mixer by 2 percent and quantity demanded falls by 10 percent what is the price elasticity of demand?

A) —5

B) —8

C) —12

D) 5

E) 12

Answer: A

Diff: 3        Page Ref: 304

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

101) When faced with price competition cutting prices is often not the best answer.

Answer: TRUE

Diff: 2        Page Ref: 293

AACSB: Analytic Skills

Skill: Application

Objective: 10-1

102) Prices have a direct impact on a company's bottom line.

Answer: TRUE

Diff: 1        Page Ref: 290

Skill: Concept

Objective: 10-1

103) Demand and consumer value perceptions set the floor for prices.

Answer: FALSE

Diff: 2        Page Ref: 291

Skill: Concept

Objective: 10-2

104) Product costs set a floor to the price; consumer perceptions of the product's value set the ceiling.

Answer: TRUE

Diff: 2        Page Ref: 291

Skill: Concept

Objective: 10-2

105) Value-based pricing is being used when costs vary directly with the level of product.

Answer: FALSE

Diff: 3        Page Ref: 291

Skill: Concept

Objective: 10-2

106) Value-based pricing uses the company's perception of value.

Answer: FALSE

Diff: 2        Page Ref: 291

Skill: Concept

Objective: 10-2

107) Value-based pricing is the reverse of cost-based pricing.

Answer: TRUE

Diff: 2        Page Ref: 291

Skill: Concept

Objective: 10-2

108) Using value-based pricing, a marketer would not design a product and marketing program before setting the price.

Answer: TRUE

Diff: 3        Page Ref: 291

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

109) EDLP is very similar to high-low pricing.

Answer: TRUE

Diff: 2        Page Ref: 293

Skill: Concept

Objective: 10-2

110) Overhead cost is another term for fixed cost.

Answer: TRUE

Diff: 1        Page Ref: 295

Skill: Concept

Objective: 10-3

111) Cost-based pricing relies on consumer perception of value to drive pricing.

Answer: FALSE

Diff: 2        Page Ref: 295

Skill: Concept

Objective: 10-3

112) Average unit cost increases with accumulated production experience.

Answer: FALSE

Diff: 1        Page Ref: 296

Skill: Concept

Objective: 10-3

113) An upward-sloping experience curve is beneficial for a company.

Answer: FALSE

Diff: 3        Page Ref: 297

Skill: Concept

Objective: 10-3

114) The simplest pricing method is cost-plus pricing, which involves adding a standard markup to the cost of the product.

Answer: TRUE

Diff: 2        Page Ref: 297

Skill: Concept

Objective: 10-3

115) Markup pricing is popular because prices tend to be similar and price competition is thus minimized.

Answer: TRUE

Diff: 2        Page Ref: 298

Skill: Concept

Objective: 10-3

116) Target profit pricing is used when a firm tries to determine the price at which it will break even or make the profit it is seeking.

Answer: TRUE

Diff: 3        Page Ref: 298

Skill: Concept

Objective: 10-3

117) A break-even chart shows the total cost and total revenue expected at various sales volume levels.

Answer: TRUE

Diff: 2        Page Ref: 298

Skill: Concept

Objective: 10-3

118) Environmental elements are categorized as external factors that affect pricing decisions.

Answer: TRUE

Diff: 2        Page Ref: 299

Skill: Concept

Objective: 10-4

119) In a pure monopoly, the market consists of one seller.

Answer: TRUE

Diff: 1        Page Ref: 303

Skill: Concept

Objective: 10-4

120) Nonregulated monopolies always charge the full price because they do not fear attracting competition.

Answer: FALSE

Diff: 2        Page Ref: 303

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

121) Marketers may learn a few simple rules that apply equally to all price-demand relationships.

Answer: FALSE

Diff: 2        Page Ref: 303

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

122) The demand curve shows the number of units the market will buy in a given time period at different prices that might be charged. In normal cases, the higher the price, the lower the demand.

Answer: TRUE

Diff: 1        Page Ref: 303

Skill: Concept

Objective: 10-4

123) If demand changes greatly with price, we say the demand is inelastic.

Answer: FALSE

Diff: 2        Page Ref: 304

Skill: Concept

Objective: 10-4

124) The more elastic the demand, the more it pays for the seller to raise the price.

Answer: FALSE

Diff: 2        Page Ref: 304

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

125) Consumers will base their judgments of a product's value on the prices that competitors charge for similar products.

Answer: TRUE

Diff: 2        Page Ref: 304

Skill: Concept

Objective: 10-4

126) Pricing and price competition account for the number-one problem facing many marketing executives. What are some of the frequent problems that companies encounter?

Answer: The pricing environment changes at a fast pace, and value-seeking customers have put increased pricing pressure on many companies. However, companies are often too quick to reduce prices in order to get a sale rather than convincing buyers that their products are worth a higher price. A company's pricing, in addition, is often too cost-oriented rather than customer-value oriented. Companies have prices that are not revised often enough to reflect market changes. Another common problem is pricing that does not take the rest of the marketing mix into account.

Diff: 2        Page Ref: 289

AACSB: Analytic Skills

Skill: Application

Objective: 10-1

127) Discuss the importance of consumer perceptions of value and costs to setting prices.

Answer: Customer perceptions of value set the upper limit for prices, and costs set the lower limit. However, in setting prices within these limits the company must then consider other internal and external factors. Internal factors affecting pricing include the company's overall marketing strategy, objectives, and marketing mix, as well as other organizational considerations. External factors include the nature of the market and demand, competitors' strategies and prices, and other environmental factors.

Diff: 1        Page Ref: 291

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

128) Explain how break-even analysis can be used for target profit pricing.

Answer: The firm determines the price at which it will break even. The firm can also add the target profit to the fixed costs and then determine the new, "break-even point," which now includes the target profit. Pricing decisions can be made by examining where the total revenue and total cost curves intersect on a break-even chart at different price points and sales volume.

Diff: 2        Page Ref: 298

AACSB: Analytic Skills

Skill: Application

Objective: 10-3

129) Identify and define the internal factors affecting a firm's pricing decisions.

Answer: The pricing strategy is largely determined by the company's target market and positioning objectives. Pricing decisions affect and are affected by product design, distribution, and promotion decisions. Costs set the floor for the company's price, which must cover all the costs of making and selling the product, plus a fair rate of return. In order to coordinate pricing goals and decisions, management must decide who within the organization is responsible for setting price.

Diff: 2        Page Ref: 299

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

130) Compare pure competition with oligopolistic competition.

Answer: Under pure competition, the market consists of many buyers and sellers trading in a uniform commodity. No single buyer or seller has much effect on the going market price. Under oligopolistic competition, the market consists of few sellers who are highly sensitive to each other's pricing and marketing strategies. The product can be uniform or nonuniform. There are few sellers because it is difficult for new sellers to enter the market. Each seller is alert to competitors' strategies and moves.

Diff: 3        Page Ref: 302-303

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

131) Compare oligopolistic competition with a pure monopoly.

Answer: Under oligopolistic competition, the market consists of a few sellers who are highly sensitive to each other's pricing and marketing strategies. There are few sellers because it is difficult for new sellers to enter the market. Under a pure monopoly, the market consists of one seller. Pricing is handled differently in each case. The seller may be a government monopoly, a private nonregulated monopoly, or a private regulated monopoly.

Diff: 3        Page Ref: 302-303

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

132) Describe what a demand curve is and explain how it helps businesses.

Answer: It estimates consumer demand at different prices. In a monopoly, the demand curve shows the total market demand resulting from different prices. If the company faces competition, its demand at different prices will depend on whether competitors' prices stay constant or change with the company's own prices.

Diff: 2        Page Ref: 303

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

133) What does price elasticity reveal about a product?

Answer: Price elasticity is a measure of the sensitivity of demand to changes in price. If demand hardly changes with a small change in price, we say the demand is inelastic. If demand changes greatly, we say the demand is elastic.

Diff: 1        Page Ref: 304

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

134) The company must consider the impact its prices will have on resellers. Identify three ways the company can help resellers.

Answer: The company, first of all, should set prices that give resellers a fair profit. The company should also encourage their support. Finally, the company should help resellers to sell the product effectively.

Diff: 1        Page Ref: 305

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

135) When setting prices, the company must consider its external environment. Describe four parts of the external environment and how they affect businesses.

Answer: Economic conditions affect both the costs of producing a product and consumer perceptions of the product's price and value. The company should encourage and support resellers and help them to sell the product effectively. The government, in the form of local, state, and federal laws, is another important influence on pricing decisions. Social concerns impact pricing, especially when a company's short-term sales, market share, and profit goals may have to be tempered by broader societal considerations.

Diff: 1        Page Ref: 305

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

136) How important is price among the elements of the marketing mix?

Answer: In recent decades, nonprice factors have gained increasing importance. However, price still remains one of the most important elements determining a firm's market share and profitability.

Diff: 2        Page Ref: 290

AACSB: Analytic Skills

Skill: Application

Objective: 10-1

137) Why is price considered to be one of the most flexible elements of the marketing mix?

Answer: Price can be changed quickly.

Diff: 1        Page Ref: 290

AACSB: Analytic Skills

Skill: Application

Objective: 10-1

138) Explain the concept of a price floor.

Answer: A price floor is the lowest price charged at which the company still earns some profits.

Diff: 2        Page Ref: 291

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

139) Explain the concept of a price ceiling.

Answer: A price ceiling is the highest price charged at which there is still some consumer demand.

Diff: 2        Page Ref: 291

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

140) What must a company using value-based pricing find out about its customers?

Answer: They must determine the specific value that individual buyers assign to different competitive offers.

Diff: 3        Page Ref: 292

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

141) Explain good-value pricing.

Answer: With good-value pricing, a marketer offers just the right combination of quality and good service at a fair price.

Diff: 1        Page Ref: 293

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

142) What must a firm do to retain pricing power?

Answer: To retain pricing power, a firm must retain of build the value of its market offering.

Diff: 2        Page Ref: 293

AACSB: Analytic Skills

Skill: Application

Objective: 10-2

143) What costs make up a product's total cost?

Answer: Fixed costs and variable costs make up total cost.

Diff: 1        Page Ref: 296

AACSB: Analytic Skills

Skill: Application

Objective: 10-3

144) Explain the significance of a downward-sloping experience curve.

Answer: Not only will the company's unit production cost fall, but it will fall faster if the company makes and sells more during a given time period.

Diff: 3        Page Ref: 297

AACSB: Analytic Skills

Skill: Application

Objective: 10-3

145) A marketer's fixed costs are $400,000, the variable cost is $16, and they expect the product to sell for $24. What is their break-even point in units?

Answer: The break-even point in units is 50,000 units.

Diff: 3        Page Ref: 298

AACSB: Analytic Skills

Skill: Application

Objective: 10-3

146) A marketer's fixed costs are $400,000, the variable cost is $16, and they expect the product to sell for $24. What is their break-even point in dollar sales?

Answer: The break-even point in dollar sales is $1,200,000.

Diff: 3        Page Ref: 298

AACSB: Analytic Skills

Skill: Application

Objective: 10-3

147) A marketer's fixed costs are $400,000, the variable cost is $16, and they expect their product to sell for $24. If the marketer has sales of $1,440,000, what is their profit on this product?

Answer: The profit is $80,000.

Diff: 3        Page Ref: 298

AACSB: Analytic Skills

Skill: Application

Objective: 10-3

148) Who typically sets prices in small companies? In large companies?

Answer: Top management sets prices in small companies, whereas divisional or product line managers typically set prices in large companies.

Diff: 2        Page Ref: 300

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

149) Explain a pure monopoly.

Answer: The market consists of one seller that dominates the market.

Diff: 2        Page Ref: 303

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

150) If demand is elastic, will sellers consider lowering their prices? Explain.

Answer: Yes. A lower price will produce more needed revenue, as consumers will respond to the change in price and buy more.

Diff: 2        Page Ref: 304

AACSB: Analytic Skills

Skill: Application

Objective: 10-4

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