Deck 16: Pricing and Credit Decisions

Question 1

Markup rates should be high enough to cover variable costs, any price reductions, and the desired profit.

Answer 1

False

Question 2

If demand for a product is elastic, a change in price will have little effect on total revenues.

Answer 2

False

Question 3

Markups may be expressed as a percentage of either the firm's cost or the industry-standard cost.

Answer 3

False

Question 4

Setting a price too high for the value being offered may result in lower quantities sold, reducing total revenue.

Question 5

Price lining refers to the systematic determination of the right price for a product or service.

Question 6

Break-even analysis is an accurate tool for pricing because it points directly to the correct price for a given product.

Question 7

Profit should always be at the heart of a pricing strategy.

Question 8

On rare occasions, pricing at less than total cost can be used as a special short-term strategy.

Question 9

Break-even analysis begins by determining what sales volume level is needed to generate a profit.

Question 10

Prestige pricing (setting a high price to convey an image of high quality or uniqueness) is a pricing tactic that reflects competitive advantage.

Question 11

Marketing expenses, factory equipment costs, and salaries of office personnel are considered variable costs.

Question 12

With a price skimming strategy, prices are set lower than what will be the normal, long-range market price to gain more market share.

Question 13

The best pricing practice is to undercut competitors' prices.

Question 14

In conducting a comprehensive break-even analysis, a firm must examine its cost-revenue relationships and incorporate sales forecasts into the analysis.

Question 15

A variable pricing strategy occurs where a business sets and advertises a fixed price but gives a discount for various reasons, such as the customer's amount purchased.

Question 16

Cost analysis can identify a level below which a price should not be set under normal circumstances.

Question 17

Pricing is not an exact science.

Question 18

A penetration price strategy is most practical when there is a low threat of short-term competition in the market or when startup costs must be recovered rapidly.

Question 19

A small business in competition with larger firms is seldom in a position to function as a price leader.

Question 20

Average pricing is an appropriate pricing approach for small businesses because the method takes into consideration both fixed and variable costs.

Question 21

Fees that credit card companies charge small businesses can cut into their profits significantly.

Question 22

An important source of credit information is the customer's previous credit history.

Question 23

Collateral is generally required for open charge accounts.

Question 24

Because it is a standard practice for many types of businesses, selling on credit cannot often be avoided.

Question 25

Credit cards are an alternative to cash.

Question 26

One of the benefits of extending credit to buyers is that doing so provides better records of purchases on credit billing statements.

Question 27

Sellers benefit from offering credit to borrowers because it helps to establish a credit history.

Question 28

If a small business has products that compete with one another, pricing decisions must take into account the effects of a single product price on the rest of the line.

Question 29

The Sherman Antitrust Act generally prohibits price fixing.

Question 30

For installment selling, the amount of credit should not exceed the repossession value of the goods sold.

Question 31

A revolving charge account would be typical for larger purchases; smaller purchases are typical on installment accounts.

Question 32

Home-based businesses will find it easy to obtain merchant status with individual credit card companies.

Question 33

In many lines of business, trade credit terms are so firmly set by tradition that a unique policy is difficult for a small firm to implement.

Question 34

Local, state, and federal laws must be considered in setting prices.

Question 35

In today's competitive environment, a cash-only seller will outsell a credit-selling competitor.

Question 36

Every applicant is creditworthy to some degree.

Question 37

Trade credit is extended to consumers purchasing large volumes of products.

Question 38

A JCPenney card is an example of a retailer credit card.

Question 39

Bank credit cards are widely accepted by retailers that want to offer credit but don't provide their own credit cards.

Question 40

An installment account is a typical trade credit agreement.

Question 41

To ensure prompt payment, a business extending credit should have adequate billing records and collection procedures.

Question 42

The Consumer Credit Protection Act requires that a finance charge be stated as an annual percentage rate and that creditors specify their procedures for correcting billing mistakes.

Question 43

The primary purposes of the Equal Credit Opportunity Act are to inform consumers about terms of a credit agreement and to require creditors to specify how finance charges are computed.

Question 44

Active Feet, a small manufacturer of shoes, hired an additional vice president and purchased a barrel of synthetic rubber used to make shoe soles. These two expenses should be considered a(n) _____ and a(n) _____, respectively.

A) selling cost; cost of goods sold
B) operating expense; cost of goods sold
C) selling cost; operating expense
D) operating expense; selling cost

Question 45

A comprehensive break-even analysis entails

A) examining cost-revenue relationships and incorporating sales forecasts into the analysis.
B) analyzing marketing strategy's effect on revenue and costs.
C) the use of comparison pricing and contribution margins.
D) approximating debits, credits, costs and sales.

Question 46

Beverly is systematically comparing various cost and revenue estimates in order to determine the acceptability of alternative prices. Beverly is using

A) break-even analysis.
B) price lining.
C) cost functioning.
D) demand functioning.

Question 47

Hollywood Amusement, a small independent movie theater, decreased the price of admission from $10 to $9. Prior to the price decrease, the business sold 1,000 tickets each month. After the price decrease, it experienced ticket sales of 1,500 a month. If the change in sales is attributable only to the change in price, Hollywood Amusement faces _____ for its movie tickets.

A) elastic demand
B) constant demand
C) inelastic demand
D) variable demand

Question 48

The measure of what a seller requires for giving up ownership or use of a product or service is

A) credit.
B) average pricing.
C) demand.
D) price.

Question 49

Commissions paid to a salesperson would be included in

A) cost of goods sold.
B) human resources.
C) operating expenses.
D) administrative costs.

Question 50

Credit bureaus maintain credit histories on individuals, based on reports from banks, mortgage companies, department stores, and other creditors.

Question 51

In general, products that are consumed in fixed amounts, regardless of price, have

A) constant demand.
B) elastic demand.
C) inelastic demand.
D) variable demand.

Question 52

If the owner of Clarisa's Fine Jewelry instructed the sales team to stress the uniqueness of the store's hand-designed jewelry, a _____ pricing strategy would be expected.

A) skimming
B) prestige
C) follow-the-leader
D) dynamic

Question 53

A business will not be successful unless it charges a price for its products that covers its total

A) cost and a margin of profit.
B) cost of goods and selling cost.
C) fixed cost and operating expense.
D) variable cost and cost of goods.

Question 54

The difference between the unit selling price and the unit variable costs and expenses is known as the

A) average price.
B) elasticity.
C) contribution margin.
D) break-even point.

Question 55

The total sales revenue of a small business is a direct reflection of

A) sales volume and credit terms.
B) price and credit terms.
C) price and expenses.
D) sales volume and price.

Question 56

Trade-credit agencies collect credit information on business firms and consumers in a given area.

Question 57

The bad-debt ratio is the ratio of bad debts to total sales.

Question 58

Diamonds and other jewels often carry a high price to convey an image of high quality or uniqueness. This type of pricing is known as

A) price skimming.
B) penetration pricing.
C) variable pricing.
D) prestige pricing.

Question 59

The aging schedule is a categorization of accounts receivable based on the length of time they have been outstanding.

Question 60

Markup pricing may be expressed in terms of a percentage of either the _____ or the cost.

A) quantity
B) operating expenses
C) selling price
D) estimated expenses

Question 61

A business that has a gaming console intended to compete directly with Sony's PlayStation gaming console would likely use a _____ pricing strategy.

A) follow-the-leader
B) penetration
C) prestige
D) variable

Question 62

Hillary wants to purchase a refrigerator on credit. If she uses an installment plan, which of the following is most likely to occur?

A) A down payment will be required.
B) A discounted price on her purchase will not be offered.
C) By law, finance charges on her account cannot exceed 20 percent of the purchase price.
D) Taxes will not be charged.

Question 63

Richard is an independent contractor and buys materials from a local builders supply store. He takes possession of the products immediately and the store bills him at the end of the month. The store is providing a(n)

A) installment account.
B) open charge account.
C) revolving account.
D) selective account.

Question 64

Stone Creek Farm sells a special type of hay to horse owners. If the farm allows its customers to have hay delivered and then be billed at a later date, it would be using which of the following types of account?

A) An open charge account
B) An installment account
C) A revolving charge account
D) A selective account

Question 65

Buying on credit _____ the amount of working capital needed by the business doing the buying.

A) augments
B) decreases
C) increases
D) offsets

Question 66

Demand for a product typically _____ as price _____.

A) decreases; increases
B) decreases; stays the same
C) stays the same; increases
D) increases; decreases

Question 67

For a price lining strategy, a company's inventory levels for each line will depend directly on the _____ of the customers.

A) buying desires and income level
B) personal demographics
C) creditworthiness
D) product awareness

Question 68

Chocolate Concoctions, a maker of high-end chocolate candies, decided to price its boxes of candies below the long-term market price. The decision was made to increase market share and discourage other firms from entering the chocolate market. Chocolate Concoctions was implementing a

A) penetration pricing strategy.
B) price lining strategy.
C) price skimming strategy.
D) variable pricing strategy.

Question 69

Lorrie Veasey, owner of All That Swag, used discount coupons for special event items to drive customers to her retail stores. Using such promotions and stating that "the regular price is never chiseled in stone" would indicate Lorrie is using a

A) variable pricing strategy.
B) price lining strategy.
C) price skimming strategy.
D) product line pricing strategy.

Question 70

Which of the following "C's" defines the customer's ability to conserve assets?

A) Capacity
B) Character
C) Collateral
D) Conditions

Question 71

Retro Hits, a local band covering songs from the 1980s and 1990s, decided they wanted to expand to more college students. Research showed students thought the current $25 ticket price was too high for a local band. To strengthen ticket demand, Retro Hits began offering $15 tickets to all fans who checked in on Facebook. The band was using a

A) variable pricing strategy.
B) price lining strategy.
C) price skimming strategy.
D) freemium pricing strategy.

Question 72

Credit cards are usually based on a(n) _____ account system.

A) installment
B) open charge
C) revolving charge
D) selective

Question 73

Within the framework of a break-even analysis, an examination of _____ is conducted to determine the quantity at which the product, with an assumed price, will generate enough revenue to start earning a profit.

A) costs
B) revenues
C) sales forecasts
D) costs and revenue

Question 74

Zemann's, a large firm selling custodial supplies to other businesses, has decided to begin offering trade credit. Its major objective in granting credit is

A) to generate consumer goodwill.
B) to make sales.
C) to promote the business
D) to reduce bad debt risk.

Question 75

Troy Bourbon, a local bourbon distillery, initially sold its product at a premium price of $45 because the company believed consumers would view the bourbon as a prestige item. The company decided that when startup costs had been fully recovered and competition became imminent, the company would reduce the price to $30 which was more expected in the market. The distillery is using a

A) variable pricing strategy.
B) price skimming strategy.
C) price lining strategy.
D) penetration pricing strategy.

Question 76

Golf Global Company sells 1,000 shirts annually at a price of $35 each. If the company's pricing policies adhere to a 40 percent markup of selling price, the cost of each shirt is

A) $14.
B) $21.
C) $28.
D) $32.

Question 77

Tick Tock, a small retailer of a quality alarm clock, sells its product based on a 35 percent markup of cost. If the firm's product costs are approximately $133, what is the selling price?

A) $138
B) $198
C) $180
D) $289

Question 78

Fine Framings, a small framing shop, uses markup pricing to arrive at a final selling price. The firm sells its frames at a price of $25, given a $15 unit cost. Fine Framings' markup on the selling price is _____, and its markup on cost is _____.

A) 66 2/3 percent; 40 percent
B) 40 percent; 66 2/3 percent
C) 167 percent; 67 percent
D) 250 percent; 100 percent

Question 79

Walmart grants credit to consumers who purchase for personal or family use. This type of credit is called

A) trade credit.
B) personal credit.
C) open credit.
D) consumer credit.

Question 80

Tanya would like to gain market share rapidly so she has priced her product at a lower than normal, long-range market price. Which of the following strategies is Tanya using?

A) Variable pricing
B) Price skimming
C) Price lining
D) Penetration pricing