03 Jan 4) Perceived value

MKT301 Principles of Marketing

Pricing Quiz

Question 1Kevin and Sarah are opening a business that delivers a week’s worth of gourmet dinners to your home every Sunday afternoon. This allows dual income busy families to have nice dinners every evening with minimal work. They plan to limit the number of customers to maintain high quality and service. Which pricing strategy you would use if you were Kevin and Sarah.

1) Penetration

2) Cost plus

3) Skimming

4) Freemium

5) Everyday low pricing

Question 2 Rob is opening a carpet cleaning business – a highly competitive business with several existing companies. He plans on sending out some direct mail advertising, with the objective of getting people to try his service and build a customer base. What pricing strategy would advise him to use?

1) Penetration

2) Cost plus

3) Skimming

4) Freemium

5) Everyday low pricing

Question 3If Rob has the following costs and sales results, what is his breakeven? (round UP to the nearest whole carpet cleaning)

Price to clean a carpet = $75

Materials (variable costs) = $15

Monthly fixed costs = $4000

1) 72

2) 67

3) 65

4) 6

5) 71

Question 4What is the unit contribution of each carpet that Rob cleans?

1) $50

2) $60

3) $9

4) $75

5) none of these is correct

Question 5Rob is considering investing in a new method of cleaning carpets that will cost him more both in fixed and variable costs, but will allow him to charge more. He wants to know what his total sales will be for both his current method and the new method at his breakeven point. You will need to calculate his BEv for both methods first and then determine his total sales for BOTH to give him the information he needs. Be sure you round UP to the nearest whole carpet.

Remember the current has these factors:

Price to clean a carpet = $75

Materials (variable costs) = $15

Monthly fixed costs = $4000

The new method has these factors:

Fixed costs: $4750

Variable costs per carpet: 18.50

Price per carpet: $99

What are Rob’s sales for the current method AND the new method, in that order?

1) $5010 and $5841

2) $5025 and $5950

3) $5025 and $5841

4) $5005 and $5775

5) There is not enough information to determine this

Question 6 Using his current method and price (shown below) for cleaning carpets what is Rob’s unit cost if he cleans 90 carpets?

Price to clean a carpet = $75

Materials (variable costs) = $15

Monthly fixed costs = $4000

1) 59.44

2) 58.66

3) 60.61

4) 67.00

5) none of these

Question 7Rob is expecting a busy holiday season and is trying to decide if he should buy the new equipment. He is projecting that he will clean 7 carpets a day and work 38 days during the holiday. If he is correct about these projections what are his gross margins for the two methods? In your answer, list the current first and then the new GM (i.e. current/new).

Remember that gross margins compare price and gross profits and is calculated as:

FORMULA = SELLING PRICE – VC

_____________________

SELLING PRICE

Current:

Price to clean a carpet = $75

Materials (variable costs) = $15

Monthly fixed costs = $4000

New:

Fixed costs: $4750

Variable costs per carpet: 18.50

Price per carpet: $99

1) 79% and 82%

2) They are the same for both methods

3) 80% and 81%

4) 81.2% and 83.1%

5) There is missing information

Question 8Kevin and Sarah are working on pricing for their gourmet dinner home delivery business. Even though they are targeting affluent families, they know that price is important to their potential customers. Kevin is a great cook but has little training in economics or accounting and knows nothing about elasticity. He looked up elasticity on Google and found the following. Which of them is not true?

1) Elasticity measures the consumer’s response to changes in price

2) Elasticity is calculated using the percent of change in demand (quantity) compared to the percent of change in price.

3) If the coefficient of elasticity is greater than 1 then the product is inelastic

4) All of these are accurate

5) Only A and B are accurate

Question 9 Kevin and Sarah want to determine if their business is elastic or inelastic and by how much. They have done some research and determined demand at their current price and at a proposed new price. What is the coefficient of elasticity for their meal service based on these projections?

Current price = $200 per week

Proposed new price = $250 per week

Current demand = 300 customers a week

Demand at the new price = 240 customers a week

The formula for calculating elasticity is:

Ed = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}

Where:

Q1 = Old Quantity – this is the current quantity

Q2 = New Quantity – this is the quantity that results from the future or proposed price change

P1 = Old Price – this is usually the current price

P2 = New Price – this is the price that will change in the future or the price that is being proposed

1) .1

2) 1.1

3) .01

4) 2.1

5) 1

Question 10 Does this coefficient make their service elastic or inelastic?

1) Elastic

2) Inelastic

3) Unitary elastic

4) None of these

Question 11Kevin and Sarah disagree on which of the two prices to charge for their weekly meal service. However, they do agree on the following demand at these two different prices and the elasticity coefficient and that elasticity is important in making pricing decisions. What they are not sure about is which will result in the most revenue. Who is right about generating more revenue?

Kevin’s price = $200 per week

Sarah’s price = $250 per week

Demand for Kevin’s price = 300 customers a week

Demand for Sarah’s price = 240 customers a week

1) Kevin

2) Sarah

3) They are both right – the revenue is the same

4) I am not going to get in the middle of a wife and husband argument

5) In order to answer they need to calculate the elasticity coefficients

Question 12 Kevin and Sarah know exactly what their costs are to make and deliver the meals to each customer. They are considering using cost plus pricing since it is easy to determine profitability. What is wrong with them using this pricing strategy?

1) It makes calculating elasticity much harder

2) Consumers are indifferent to their costs

3) The cost of food, gas and labor are unpredictable

4) It ignores the value of how consumers perceive a premium exclusive product

5) Answers B and D

Question 13 Kevin’s friend, Sam, runs a septic tank repair business. Your research shows that the following price and demand for servicing a tank:

Current Price: $300

New Price: $375

Current demand: 450 tanks

New demand 425 tanks

What is the coefficient of elasticity for Sam’s business?

Here is the formula for calculating elasticity:

Ed = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}

1) .222

2) .337

3) .75

4) .256

5) 1

Question 14 Does this coefficient make Sam’s septic tank business elastic or inelastic?

1) Elastic

2) Inelastic

3) Unitary elastic

4) None of these

Question 15 Kevin and Sarah’s friend Ally wants in on the entrepreneurial action and decides to sell her world famous Mega-Death Choco Cookies at fairs and church carnivals. She has learned the following calculations for gross margins:

Gross margin (as a percent) = (Selling price – costs) / Selling price

Gross profit in dollars = selling price – costs

At the county fair she had the following results:

Price for a dozen cookies = $12

Costs for ingredients = $3

Booth and table cloth = $150

Other fixed expenses = $200

In two days, she sold 214 dozen cookies (these are really good cookies)

What is Ally’s gross margin for a dozen cookies?

1) 70%

2) 68%

3) 75%

4) 50%

5) She needs more information to know

Question 16 What is the gross profit for all the cookies she sold?

1) $1126

2) $1960

3) $2568

4) $1926

5) $642

Question 17 Ally wants to know what her total costs are for each dozen cookies she sells, including her fixed costs and any initial investment. What is Ally’s unit cost for each dozen cookies? Remember she determined her costs as:

Price for a dozen cookies = $12

Costs for ingredients = $3

Booth and table cloth = $150

Other fixed expenses = $200

Unit sales = 214 dozen

UC = VC + (FIXED COSTS/UNIT SALES)

1) $3.93

2) $4.63

3) $2.14

4) $3.00

5) $4.00

Question 18 Ally’s friend, Kat, is going to start selling cookies for her at local events. Ally is going to give her 40% of the gross profit for each dozen she sells as a commission. The investment and fixed costs have changed but the variable cost for each dozen cookies has not. Since the cookies are so popular they are raising the price to $15 per dozen.

Ally’s costs are:

Initial investment: $450

Fixed costs: $375

Variable costs: $3 (per dozen)

Ally expects Kat to sell 100 dozen cookies at each event. What is Ally’s projected NET profit after ALL expenses including her initial investment for the first twelve events Kat attends and how much will Kat make in commissions?

Ally’s Net Profit = ; Kat’s Commission =

1) Ally’s Net Profit = $13,575; Kat’s Commission = $3,600

2) Ally’s Net Profit = $10,185; Kat’s Commission = $4,800

3) Ally’s Net Profit = $7,815; Kat’s Commission = $5,760

4) Ally’s Net Profit = $9,815; Kat’s Commission = $6,760

Question 19Ally has promised Kat that she will get the same $3 per dozen commission regardless of what price the cookies sell for. This makes Ally’s new costs look like this:

Initial investment: $450

Fixed costs: $375

Variable costs: $3 (per dozen)

Commission; $3 (per dozen)

Ally is curious about what price she needs to charge to get a 60% Return on Investment (ROI) including her variable costs, initial investment and fixed costs. What price will she need to charge for a 60% ROI? For this calculation Ally is assuming sales of 900 dozen (900 units). Pay close attention to the investment and unit cost figures.

This was covered in Module 6 and the formula is:

FORMULA: ROI PRICE = UNIT COST + (ROI x INVESTMENT) / UNIT SALES

HINT: Make sure you include all of Ally’s expenses in the right category

1) 3.42

2) 3.72

3) 3.90

4) 4.21

Question 20 Incredible Games (IG) is introducing Galactic Invasion, in which aliens from the Planet Meepzorp attack earth in hopes of capturing millions of college students to take back home to develop social media applications. IG wants to attract lots of new players very quickly and build a growing revenue stream as they become hooked on the game. What pricing strategy do you suggest they use to entrap millions of humans?

1) Penetration

2) Freemium

3) Skimming

4) Perceived value

5) Premium