10 CHAPTER RETAIL PRICING
MULTIPLE CHOICE
1. The relationship between a retailers pricing decisions and the other (i.e. merchandise selection,
promotion, location) decision areas can best be described as:
a.
independent.
b.
competitive.
c.
separate.
d.
counter-related.
e.
interactive.
ANS: E
PTS: 1
REF: p. 357
OBJ: LO 10-1
2. As a rule, if a retailer wants to expand its trading area, it should _____ its merchandise.
a.
lower the prices of
b.
double both its prices and promotion of
c.
deemphasize the services it provides with
d.
increase the services provided the customer
and reduce the promotional activities
associated with
e.
reduce the promotional activities associated
with
ANS: A
PTS: 1
REF: p. 360
OBJ: LO 10-1
3. A _____ objective is a pricing objective that states a specific level of profit, such a as percentage of
sales or a return on capital invested, as an objective.
a.
profit maximization
b.
target-return
c.
percentage-of-sales
d.
competition-oriented
e.
skimming
ANS: B
PTS: 1
REF: p. 365
OBJ: LO 10-1
4. _____ is a pricing objective that seeks to obtain as much profit as possible.
a.
Profit maximization
b.
Targetreturn
c.
Percentage-of-sales
d.
Competition-oriented
e.
Skimming
ANS: A
PTS: 1
REF: p. 365
OBJ: LO 10-1
5. A skimming strategy will work best for a retailer when:
a.
competition is high because it skims right
above the retailers costs.
b.
revenues are equal to expenses.
c.
the retailer has a temporary monopoly with its
product line.
d.
the retailer has excess capacity in its building.
e.
ANS: C
demand is less than supply.
PTS: 1
REF: p. 365
OBJ: LO 10-1
6. You have decided that one of the goals of your retail expansion is to establish a loyal customer base
before the competition is able to do so. Therefore, when you enter a new trading area with a new
product or service, you should use a _____ price strategy.
a.
late markdown
b.
penetration
c.
status quo
d.
skimming
e.
cost-plus
ANS: B
PTS: 1
REF: p. 365
OBJ: LO 10-1
7. All of the following are typical pricing objectives EXCEPT:
a.
target-return.
b.
sales maximization
c.
status quo.
d.
profit maximization
e.
sales-oriented.
ANS: B
PTS: 1
REF: p. 365
OBJ: LO 10-1
8. Home Depot employees regularly shop at Lowes stores in order to make certain that Home Depot is
charging comparable prices. Home Depot is engaging in:
a.
leader pricing.
b.
flexible pricing.
c.
corporate espionage.
d.
functional pricing.
e.
status quo pricing.
ANS: E
PTS: 1
REF: p. 365
OBJ: LO 10-1
9. A _____ pricing objective adopts a mentality to not rock the boat, and to leave prices as they are.
a.
peer
b.
head-on
c.
direct
d.
status quo
e.
target-return
ANS: D
PTS: 1
REF: p. 365
OBJ: LO 10-1
10. McDonalds recently lowered the price of a Big Mac from $2.49 to $.99. Within two days, the
neighboring Burger King matched the new price on its Whopper sandwich. This is an example of
_____ pricing.
a.
target
b.
status quo
c.
competitive
d.
comparable
e.
market share
ANS: B
PTS: 1
REF: p. 365
OBJ: LO 10-1
11. The rules of action or guidelines that ensure uniformity of pricing decisions within a retail operation
are know as the retailers pricing:
a.
tactics.
b.
rules.
c.
policies.
d.
strategies.
e.
objectives.
ANS: C
PTS: 1
REF: p. 365
OBJ: LO 10-1
12. A(n) _____ pricing policy is a policy that regularly discounts merchandise from the established market
price in order to build store traffic, generate high sales, and enhance gross margin dollars per square
foot of selling space.
a.
above-market
b.
flexible
c.
odd-pricing
d.
below-market
e.
loss leader
ANS: D
PTS: 1
REF: p. 366
OBJ: LO 10-1
13. Which of the following is NOT a characteristic of a retailer that prices below the market?
a.
Provides minimal customer services
b.
Low sales volume
c.
Stocks closeout merchandise
d.
Stocks fast-selling merchandise
e.
Occupies modest facilities in a low-rent
location
ANS: B
PTS: 1
REF: p. 366
OBJ: LO 10-1
14. A _____ is a range of prices for a specific merchandise line that appeals to customers in a certain
demographic group.
a.
penetration price
b.
odd price
c.
price line
d.
price point
e.
price zone
ANS: E
PTS: 1
REF: p. 367
OBJ: LO 10-1
15. _____ is a policy where retailers establish high prices because nonprice factors are more important to
their target market than price.
a.
Above-market
b.
Flexible
c.
Odd-pricing
d.
Below-market
e.
Leader pricing
ANS: A
PTS: 1
REF: p. 369
16. A _____ is least apt to use an above-market pricing policy.
OBJ: LO 10-1
a.
b.
small neighborhood drugstore
top-of-line apparel retailer, such as Neiman
Marcus
mom-and-pop grocery store
warehouse club
fast-food restaurant located on a turnpike
c.
d.
e.
ANS: D
PTS: 1
REF: p. 369
OBJ: LO 10-1
17. Which of the following conditions does NOT allow a retailer to price above the market?
a.
Offering an exclusive merchandise line
b.
Maintaining extended hours of operation
c.
Having a competitor with similar merchandise
lines located next door
d.
Having outlets in accessible and convenient
locations
e.
Providing extra services
ANS: C
PTS: 1
REF: p. 369-370
OBJ: LO 10-1
18. Retailers that offer extended shopping hours are more likely to pursue a(n) _____ pricing policy.
a.
above-themarket
b.
profit maximization
c.
flexible pricing
d.
competitive
e.
comparative
ANS: A
PTS: 1
REF: p. 370
OBJ: LO 10-1
19. An example of a retailer using customary pricing would be:
a.
a local barber shop maintaining the price of a
haircut at $9.00.
b.
a local hardware store promising to undersell
the competition by at least 1 percent.
c.
Wal-Mart promising to always have the
lowest prices in town.
d.
setting a price at $4.99 instead of $5.00.
e.
charging different consumers different prices.
ANS: A
PTS: 1
REF: p. 370
OBJ: LO 10-2
20. _____ pricing is a policy in which the retailer sets prices for goods and services, with the intent to
maintain those prices over an extended period of time.
a.
Customary
b.
Variable
c.
Flexible
d.
Leader
e.
Specified
ANS: A
PTS: 1
REF: p. 370
OBJ: LO 10-2
21. The local barber shop sets its price at $12 per haircut. The customers take these prices for granted for a
long period of time. This is an example of:
a.
b.
c.
d.
e.
ANS: B
below-market pricing.
customary pricing.
variable pricing.
flexible pricing.
price lining.
PTS: 1
REF: p. 370
OBJ: LO 10-2
22. A _____ pricing policy permits a retailer to charge different prices for goods and services in order to
reflect changes in demand.
a.
flexible
b.
dynamic
c.
psychological
d.
variable
e.
customary
ANS: D
PTS: 1
REF: p. 370
OBJ: LO 10-2
23. _____ pricing is used when differences in demand and cost force the retailer to change prices in a
fairly predictable manner.
a.
Unbundled
b.
Uncustomary
c.
Variable
d.
Flexible
e.
Leader
ANS: C
PTS: 1
REF: p. 370
OBJ: LO 10-2
24. Walts Flowers offers bouquets of red roses for $24.99 during the month of January. On Valentines
Day, Walts offers the same type of bouquet for $49.99. This is an example of:
a.
below-market pricing.
b.
customary pricing.
c.
variable pricing.
d.
flexible pricing.
e.
price lining.
ANS: C
PTS: 1
REF: p. 370
OBJ: LO 10-2
25. A(n) _____ pricing policy is likely to occur when a retailers sales staff offers the same products and
quantities to different customers at different prices.
a.
flexible
b.
customary
c.
one-price
d.
leader
e.
variable
ANS: A
PTS: 1
REF: p. 370
OBJ: LO 10-2
26. An example of a _____ pricing policy is when movie theaters give discounts to special groups, such as
seniors.
a.
customary
b.
variable
c.
leader
d.
e.
ANS: E
specified
flexible
PTS: 1
REF: p. 370-371
OBJ: LO 10-2
27. What type of pricing policy increases both the efficiency and fairness in handling customer
transactions especially where the selling activity is delegated to salespersons who have varying
degrees of loyalty to the retailer?
a.
Variable
b.
Flexible
c.
Price lining
d.
One-price
e.
Multiple-unit
ANS: D
PTS: 1
REF: p. 371
OBJ: LO 10-2
28. A(n) _____ policy enables a retailer to speed up transaction time and reduces the need for highly
skilled salespeople.
a.
one-price
b.
flexible pricing
c.
odd pricing
d.
variable pricing
e.
customary pricing
ANS: A
PTS: 1
REF: p. 371
OBJ: LO 10-2
29. As a rule, most catalog operators must use a(n) _____ policy, since they are forced to retain their
prices until the expiration date of the catalog.
a.
standard
b.
price line
c.
customary
d.
leader
e.
one-price
ANS: E
PTS: 1
REF: p. 371
OBJ: LO 10-2
30. _____ is a pricing policy that was established to help customers make merchandise comparisons and
involves establishing a specified number of price points for each merchandise classification.
a.
Leader pricing
b.
Price lining
c.
Minimal pricing
d.
Simplified pricing
e.
Macro pricing
ANS: B
PTS: 1
REF: p. 372
OBJ: LO 10-2
31. Your local bike shop offers a wide variety of bicycles at the following price levels: $99.99, $160.99,
$320.95, $619.99, and $1039.99. The bike shop is using a _____ pricing strategy.
a.
standard price mix
b.
price lining
c.
multiple-unit
d.
variable
e.
flexible
ANS: B
PTS: 1
REF: p. 372
OBJ: LO 10-2
32. If a salesperson persuades a customer to purchase a higher-priced item than the customer initially
intended, the salesperson has _____ the customer.
a.
flexed
b.
tricked
c.
traded up
d.
baited
e.
ripped
ANS: C
PTS: 1
REF: p. 372
OBJ: LO 10-2
33. Pricing a product at $49.98 instead of $50.00 is called:
a.
bait-and-switch pricing.
b.
price pointing.
c.
odd pricing.
d.
price lining.
e.
even pricing.
ANS: C
PTS: 1
REF: p. 372
OBJ: LO 10-2
34. After being introduced to a higher-priced washing machine, the customer expresses a desire to
purchase a lower-priced item. When this happens, the customer is said to have:
a.
bailed.
b.
traded up.
c.
yielded.
d.
traded down.
e.
extended.
ANS: D
PTS: 1
35. An example of odd pricing would be:
a.
b.
c.
d.
e.
ANS: E
PTS: 1
REF: p. 372
OBJ: LO 10-2
a low introductory price followed by a sharp
price increase.
buy one, get one free.
having the selling price end in any odd
number.
subtracting a trade-in from the selling price.
selling a product for $39.98 instead of $40.00.
REF: p. 372
OBJ: LO 10-2
36. _____ pricing occurs when the price of each unit as a multi-unit package is less than the price of each
unit if it were sold individually.
a.
Bundle
b.
One-price
c.
Leader
d.
Loss leader
e.
Multiple-unit
ANS: E
PTS: 1
REF: p. 373
OBJ: LO 10-2
37. _____ occurs when distinct multiple items, generally from different merchandise lines, are offered at a
special sale price.
a.
Bundling
b.
Multi-unit pricing
c.
Odd pricing
d.
Leader pricing
e.
Price lining
ANS: A
PTS: 1
REF: p. 373
OBJ: LO 10-2
38. A local motel used to offer free continental breakfast as part of its room rate. Now, customers must pay
$5.00 each for breakfast. This is an example of:
a.
entrapment.
b.
unbundling.
c.
bait-and-switch pricing.
d.
bundling.
e.
loss-leader pricing.
ANS: B
PTS: 1
REF: p. 373
OBJ: LO 10-2
39. A landlord charges the same apartment rent as last year, but now adds a fee for parking spaces. This
practice is known as:
a.
entrapment.
b.
unbundling.
c.
bait-and-switch pricing.
d.
bundling.
e.
high-low pricing.
ANS: B
PTS: 1
REF: p. 373
OBJ: LO 10-2
40. In _____ pricing, a high-demand item is priced low and advertised heavily in an effort to attract
consumers into a store.
a.
bait
b.
multiple-unit
c.
variable
d.
leader
e.
odd
ANS: D
PTS: 1
REF: p. 374
OBJ: LO 10-2
41. When a supermarket advertises a 2 liter bottle of Coca Cola for $0.79 (a product regularly priced at
$1.19), there is a good chance the supermarket is utilizing a(n) _____ pricing strategy.
a.
entrapment
b.
EDLP
c.
leader
d.
bait
e.
target
ANS: C
PTS: 1
REF: p. 374
OBJ: LO 10-2
42. For leader pricing to be effective, which of the following guidelines should be followed?
a.
Not many customers should actually want to
buy the leader item.
b.
The leader item must have had a very high
markup before being discounted.
The leader item must have narrow appeal
within the retailers target market.
The leader item must be an item frequently
purchased by the consumer.
It should never be sold below cost.
c.
d.
e.
ANS: D
PTS: 1
REF: p. 374
OBJ: LO 10-2
43. A retailer wants to increase the number of customers coming into its store. Which of the following
pricing strategies has the greatest potential for success?
a.
Promotional pricing
b.
Bundle pricing
c.
Price flexibility
d.
Odd pricing
e.
Leader pricing
ANS: E
PTS: 1
REF: p. 374
OBJ: LO 10-2
44. When a retailer increases the number of customers coming into its store by advertising a widely known
and frequently purchased product below cost, it is following a _____ strategy.
a.
promotional pricing
b.
unit pricing
c.
loss-leader pricing
d.
leader pricing
e.
below-market pricing
ANS: C
PTS: 1
REF: p. 374
OBJ: LO 10-2
45. A _____ pricing strategy involves the use of high everyday prices and low leader specials on
featured items in a retailers weekly ads.
a.
flexible
b.
leader
c.
competitive
d.
variable
e.
high-low
ANS: E
PTS: 1
REF: p. 374
OBJ: LO 10-2
46. _____ is a practice where a low-priced model of a shopping good is used to lure shoppers into a store
where the salesperson will attempt to persuade them to purchase a higher-priced model.
a.
Leader pricing
b.
High-low pricing
c.
Multiple-unit pricing
d.
Price lining
e.
Bait-and-switch pricing
ANS: E
PTS: 1
REF: p. 374
OBJ: LO 10-2
47. If a retailer buys a product for $30 and sells it for $50, what is the markup percentage, if the markup is
based on cost?
a.
33 percent
b.
c.
d.
e.
ANS: C
40 percent
67 percent
80 percent
100 percent
PTS: 1
48. Percentage markup on selling price equals:
a.
b.
c.
d.
e.
ANS: D
PTS: 1
REF: p. 376
OBJ: LO 10-3
markup/cost.
initial markup - maintained markup.
percentage markup on selling price/(100
percent - percentage markup on selling price).
(percentage markup on cost)/(100 percent +
percentage markup on cost).
100 percent - percentage markup on cost.
REF: p. 376
OBJ: LO 10-3
49. If the percentage markup on cost is 100 percent, what is the percentage markup on selling price?
a.
33 percent
b.
300 percent
c.
100 percent
d.
150 percent
e.
50 percent
ANS: E
PTS: 1
REF: p. 376
OBJ: LO 10-3
50. A markup on selling price of 25 percent is equal to a markup on cost of:
a.
100 percent.
b.
25.0 percent.
c.
33.3 percent.
d.
50.0 percent.
e.
75.0 percent.
ANS: C
PTS: 1
REF: p. 376
OBJ: LO 10-3
51. If the percentage markup on cost is 50 percent, what is the percentage markup on selling price?
a.
140 percent
b.
100 percent
c.
28.5 percent
d.
33.3 percent
e.
50 percent
ANS: D
PTS: 1
REF: p. 376
OBJ: LO 10-3
52. If the markup percentage on cost is 75 percent, what is markup percentage on selling price?
a.
25.0 percent
b.
42.8 percent
c.
57.2 percent
d.
75.0 percent
e.
175.0 percent
ANS: B
PTS: 1
REF: p. 376
OBJ: LO 10-3
53. If a retailer buys a product for $40 and sells it for $70, what is the markup percentage, if the markup is
based on the cost?
a.
43 percent
b.
57 percent
c.
75 percent
d.
110 percent
e.
175 percent
ANS: C
PTS: 1
REF: p. 376
OBJ: LO 10-3
54. If a retailer can sell an item for $6 and needs a 40 percent markup on retail to meet profit objectives,
that retailer should pay no more than _____ for the item.
a.
$2.40
b.
$3.60
c.
$6.40
d.
$8.40
e.
$9.60
ANS: B
PTS: 1
REF: p. 377
OBJ: LO 10-3
55. If a retailer sells a product for $22 and the markup is 30 percent based on selling price, what did the
retailer pay for the product?
a.
$6.60
b.
$15.40
c.
$22.00
d.
$28.60
e.
$35.00
ANS: B
PTS: 1
REF: p. 377
OBJ: LO 10-3
56. If a retailer sells a product for $125 and the markup is 30 percent based on selling price, what did the
retailer pay for the product?
a.
$37.50
b.
$87.50
c.
$125.00
d.
$162.50
e.
$357.50
ANS: B
PTS: 1
REF: p. 377
OBJ: LO 10-3
57. If an item costs a retailer $75 and the retailers markup percentage is 30 percent based on cost, what is
the retailers selling price?
a.
$22.50
b.
$97.50
c.
$208.33
d.
$283.33
e.
Cannot be determined with the information
provided.
ANS: B
PTS: 1
REF: p. 377
OBJ: LO 10-3
58. A furniture store advertises a kitchen set for $699, and it costs the retailer $275. What are the initial
markup percentage and the maintained markup percentage if the retailer ultimately sells the set on sale
for $370?
a.
154.2 percent; 34.5 percent
b.
39.3 percent; 74.3 percent
c.
60.7 percent; 25.7 percent
d.
34.5 percent; 25.7 percent
e.
37.8 percent; 19.5 percent
ANS: C
PTS: 1
REF: p. 378
OBJ: LO 10-3
59. Mikes Appliances bought a refrigerator for $480. The initial price on the refrigerator was $950, but it
was ultimately sold for $825. What were initial and maintained markups, respectively?
a.
36.3 percent; 57.0 percent
b.
46.3 percent; 58.2 percent
c.
49.5 percent; 41.8 percent
d.
50.5 percent; 58.2 percent
e.
63.7 percent; 43.0 percent
ANS: C
PTS: 1
REF: p. 378
OBJ: LO 10-3
60. Which of the following is NOT an item that must be considered when planning an initial markup?
a.
Customer returns and allowances
b.
Stock shortages
c.
Planned gross margin
d.
Cash discounts to customers
e.
Employee discounts
ANS: A
PTS: 1
REF: p. 379
OBJ: LO 10-3
61. Given the following information, what is the initial markup percentage? Planned sales = $230,000;
planned profit = $20,000; planned expenses = $50,000 and planned reductions = $10,000.
a.
29.2 percent
b.
30.4 percent
c.
33.3 percent
d.
34.8 percent
e.
39.9 percent
ANS: C
PTS: 1
REF: p. 379-380
OBJ: LO 10-3
62. Given the following information, what is the initial markup percentage? Planned sales = $180,000;
planned expenses = $48,000; planned profit = $12,000 and planned reductions = $4,000.
a.
33 percent
b.
39 percent
c.
35 percent
d.
37 percent
e.
40 percent
ANS: C
PTS: 1
REF: p. 379-380
OBJ: LO 10-3
63. Given the following information, what is the initial markup percentage? Planned sales = $175,000;
planned profit = $4,300; planned expenses = $32,000 and planned reductions = $4,700.
a.
33 percent
b.
27 percent
c.
d.
e.
ANS: C
23 percent
42 percent
68 percent
PTS: 1
REF: p. 379-380
OBJ: LO 10-3
64. Given the following information, what initial markup percentage should be planned if net sales are
expected to be $500,000?
Operating expenses
Net profit goal
Planned reductions for markdowns
Planned reductions for theft/shortage/discount
Alteration costs
Cash discounts received by the retailer
a.
b.
c.
d.
e.
ANS: B
$120,000
$30,000
$32,000
$8,000
$10,000
$5,000
28 percent
36 percent
30 percent
39 percent
45 percent
PTS: 1
REF: p. 379-380
OBJ: LO 10-3
65. Given the following information, what is the initial markup percentage?
Net sales
Reductions
Profit
Operating expenses
$60,000
2,000
8,000
12,000
a.
b.
c.
d.
e.
ANS: C
20 percent
32 percent
35 percent
38 percent
68 percent
PTS: 1
REF: p. 379-380
OBJ: LO 10-3
66. Which of the following situations is NOT a good reason for using a high markup percentage?
a.
The products have a high risk of a price
reduction due to the seasonality of the goods
b.
The products have low fixed costs associated
with their sale
c.
The products have a low elasticity of demand
d.
The products have high handling and storage
costs
e.
The products are only sold through few retail
outlets
ANS: B
PTS: 1
REF: p. 381
OBJ: LO 10-3
67. Reductions in the price of an item that are taken in order to stimulate sales are termed:
a.
maintained price cuts.
b.
promotional price cuts.
c.
shortages.
d.
markdowns.
e.
initial price cuts.
ANS: D
PTS: 1
68. Markdown percentage is calculated by:
a.
b.
c.
d.
e.
ANS: A
PTS: 1
REF: p. 381
OBJ: LO 10-4
dividing the amount of the reduction by the
original selling price.
dividing the amount of the reduction by the
original cost.
dividing the amount of the reduction by the
price after the markdown.
dividing the amount of the reduction by
difference between the cost and the original
selling price.
dividing the amount of the reduction by the
net sales.
REF: p. 381
OBJ: LO 10-4
69. The retailer who never makes a buying error is probably:
a.
missing profit opportunities by being too
conservative.
b.
overestimating demand.
c.
overpromoting.
d.
maximizing profits.
e.
maintaining higher markup percentages.
ANS: A
PTS: 1
REF: p. 382
OBJ: LO 10-4
70. If a retailer is experiencing a low inventory turnover rate, it may pursue a(n) _____ markdown policy
to speed the movement of its existing inventory.
a.
conservative
b.
early
c.
radical
d.
equivalent
e.
liberal
ANS: B
PTS: 1
REF: p. 383
OBJ: LO 10-4
71. An advantage of a(n) _____ markdown policy is that it allows the retailer to replenish lower-priced
lines from the higher priced lines that have been marked down.
a.
low
b.
early
c.
segmented
d.
late
e.
flexible
ANS: B
PTS: 1
REF: p. 383
OBJ: LO 10-4
72. A(n) _____ policy should be adopted when the retailer wants to avoid disrupting the sale of regular
merchandise by marking down goods too frequently.
a.
early
b.
late
c.
negative
d.
flexible
e.
steady
ANS: B
PTS: 1
73. Maintained markup percentage equals:
a.
b.
c.
d.
e.
ANS: A
PTS: 1
REF: p. 383
OBJ: LO 10-4
initial markup percentage - [(reduction
percentage)(100 percent - initial markup
percentage)].
(original retail price - cost)/original retail
price.
initial markup percentage + [(reduction
percentage)(100 percent - initial markup
percentage].
(gross margin + alteration costs +
reductions) / (net sales + reductions).
(percentage markup on selling price) / (100
percent - percentage markup on selling price).
REF: p. 385
OBJ: LO 10-4
74. A portable CD player was originally priced at $79.95 and cost $39 is ultimately sold for $64.95. What
was the maintained markup percentage on the portable CD player?
a.
19 percent
b.
38 percent
c.
40 percent
d.
49 percent
e.
70 percent
ANS: C
PTS: 1
REF: p. 385
OBJ: LO 10-4
75. Given the following information, what is the maintained markup percentage? Planned sales =
$200,000; planned initial markup = 40 percent; planned reductions = $10,000.
a.
35 percent
b.
37 percent
c.
38 percent
d.
40 percent
e.
50 percent
ANS: B
PTS: 1
REF: p. 385
OBJ: LO 10-4
76. Given the following information, what is the maintained markup percentage? Initial markup
percentage = 35 percent; reduction percentage = 5 percent.
a.
35.0 percent
b.
30.0 percent
c.
40.0 percent
d.
32.0 percent
e.
ANS: D
45.0 percent
PTS: 1
REF: p. 385
OBJ: LO 10-4
77. A DVD player that was originally priced at $399.95 and cost $215 is ultimately sold for $349.95.
What were the reduction percentage and the maintained markup percentage on this DVD player?
a.
14.3 percent; 38.6 percent
b.
12.5 percent; 38.6 percent
c.
38.6 percent; 12.5 percent
d.
15.1 percent; 38.6 percent
e.
46.2 percent; 12.5 percent
ANS: A
PTS: 1
REF: p. 385
OBJ: LO 10-4
78. A portable CD player was originally priced at $79.95 and cost $39 is ultimately sold for $64.95. What
was the reduction percentage on the portable CD player?
a.
19 percent
b.
23 percent
c.
38 percent
d.
49 percent
e.
58 percent
ANS: B
PTS: 1
REF: p. 385
OBJ: LO 10-4
TRUE/FALSE
1. Pricing is an independent decision made separate with the firms mission statement, its goals and
objectives, its strategy, its operational management, and administrational management.
ANS: F
PTS: 1
REF: p. 357
OBJ: LO 10-1
2. Retailers should set prices without worrying analyzing about the attributes of the merchandise being
priced.
ANS: F
PTS: 1
REF: p. 360
OBJ: LO 10-1
3. The retailers controllable element of price can be either the cost of goods sold or the gross margin that
is added to the cost.
ANS: T
PTS: 1
REF: p. 360
OBJ: LO 10-1
4. The closer a retailers store is to competitors having identical or similar merchandise, the greater
pricing flexibility the retailer will have.
ANS: F
PTS: 1
REF: p. 360
OBJ: LO 10-1
5. A retailer must consider the impact of a customers travel costs when determining what price a
customer will pay for merchandise.
ANS: T
PTS: 1
REF: p. 360
OBJ: LO 10-1
6. As a rule, a retailers pricing and promotion decisions should not be made independently of each other.
ANS: T
PTS: 1
REF: p. 361
OBJ: LO 10-1
7. A retailer that offers credit will generate greater demand than the retailer that does not sell on credit.
ANS: T
PTS: 1
REF: p. 361
OBJ: LO 10-1
8. Teenagers under 18 are legally liable for their credit-card debts.
ANS: F
PTS: 1
REF: p. 362
OBJ: LO 10-1
9. E-tailers targeting teens may choose to do so in order to develop a strong loyalty with those teenagers.
ANS: T
PTS: 1
REF: p. 362
OBJ: LO 10-1
10. As a rule, retailers that offer greater levels of customer service tend to have higher prices.
ANS: T
PTS: 1
REF: p. 362
OBJ: LO 10-1
11. Customer service standards vary throughout the world.
ANS: T
PTS: 1
REF: p. 362
OBJ: LO 10-1
12. One of the cues a customer uses in determining a retailers image is the retailers prices.
ANS: T
PTS: 1
REF: p. 362
OBJ: LO 10-1
13. Pricing decisions are fairly complicated in the U.S. when compared to other countries retail
environments.
ANS: F
PTS: 1
REF: p. 363
OBJ: LO 10-1
14. A retailers pricing objectives need not be in agreement with its mission statement and merchandising
policies.
ANS: F
PTS: 1
REF: p. 364
OBJ: LO 10-1
15. Target return pricing is the practice of selling at the lowest price so that the competition can never
undersell you.
ANS: F
PTS: 1
REF: p. 365
OBJ: LO 10-1
16. When a retailer is charging all the traffic will bear, it is said to be using a skimming pricing
objective.
ANS: F
PTS: 1
REF: p. 365
OBJ: LO 10-1
17. A major advantage of the profit maximization objective is that it helps to establish a loyal customer
base.
ANS: F
PTS: 1
REF: p. 365
OBJ: LO 10-1
18. Sales-oriented objectives are based on achieving a certain level of sales, market share, or profit.
ANS: F
PTS: 1
REF: p. 365
OBJ: LO 10-1
19. Retailers who are happy with their current market share and level of profits will generally prefer a
status quo pricing objective.
ANS: T
PTS: 1
REF: p. 365
OBJ: LO 10-1
20. Pricing policies are rules of action, or guidelines, that ensure uniformity of pricing decisions within a
retail operation.
ANS: T
PTS: 1
REF: p. 365
OBJ: LO 10-1
21. Very few types of retail establishments are able to attract all segments of a target market.
ANS: T
PTS: 1
REF: p. 366
OBJ: LO 10-1
22. A retail stores pricing policies should reflect the expectations of its target market.
ANS: T
PTS: 1
REF: p. 366
OBJ: LO 10-1
23. Profitability is directly related to the gross-margin percentage of the product sold.
ANS: F
PTS: 1
REF: p. 366
OBJ: LO 10-1
24. Profitability is not directly related to the amount of gross margin per unit sold times the number of
units sold.
ANS: F
PTS: 1
REF: p. 366
OBJ: LO 10-1
25. A price zone is a range of prices for a particular merchandise line that appeals to customers in a certain
market segment.
ANS: T
PTS: 1
REF: p. 367
OBJ: LO 10-1
26. A small neighborhood drugstore is probably forced to use above-the-market pricing because of their
low cost structure and high sales volume.
ANS: F
PTS: 1
REF: p. 369
OBJ: LO 10-1
27. Some consumers will pay higher-than-average prices for specialty items.
ANS: T
PTS: 1
REF: p. 369
OBJ: LO 10-1
28. The easy access location of gift shops in hotels and airline terminals allows retailers in these locations
to charge higher prices.
ANS: T
PTS: 1
REF: p. 370
OBJ: LO 10-1
29. Movies and vending machine products are common examples of items that use customary pricing.
ANS: T
PTS: 1
REF: p. 370
OBJ: LO 10-2
30. A florist is likely to adopt a customary pricing strategy, especially as Valentines Day approaches.
ANS: F
PTS: 1
REF: p. 370
OBJ: LO 10-2
31. As a rule, retailers such as car dealers that sell expensive products requiring a great deal of personal
selling will be more likely to adopt a flexible pricing strategy than will a discounter.
ANS: T
PTS: 1
REF: p. 370
OBJ: LO 10-2
32. Most jewelry stores and automobile dealerships use the customary pricing policy.
ANS: F
PTS: 1
REF: p. 370
OBJ: LO 10-2
33. A local retailer offers T-shirts at three price levels. Consumers can pay $6.99, $14.99, or $27.99 for the
shirts. This pricing strategy is called variable pricing.
ANS: F
PTS: 1
REF: p. 370
OBJ: LO 10-2
34. A one-price policy may be used in conjunction with customary or variable pricing.
ANS: T
PTS: 1
REF: p. 371
OBJ: LO 10-2
35. A one-price policy increases the need for highly skilled salespeople.
ANS: F
PTS: 1
REF: p. 371
OBJ: LO 10-2
36. A one-price policy speeds the amount of time needed to complete a customer transaction.
ANS: T
PTS: 1
REF: p. 371
OBJ: LO 10-2
37. The practice of advertising a low-priced model of a shopping good which the retailer has no intention
of selling, in order to lure shoppers into a store is called trading up.
ANS: F
PTS: 1
REF: p. 372
OBJ: LO 10-2
38. Odd pricing is another name for flexible pricing.
ANS: F
PTS: 1
REF: p. 372
OBJ: LO 10-2
39. Because odd prices are associated with low prices, they are typically used by retailers who sell at
prices below the market or at the market.
ANS: T
PTS: 1
REF: p. 373
OBJ: LO 10-2
40. Nordstroms would likely use an odd-pricing strategy.
ANS: F
PTS: 1
REF: p. 373
OBJ: LO 10-2
41. Retailers use multiple-unit pricing to encourage additional sales and to increase profits.
ANS: T
PTS: 1
REF: p. 373
OBJ: LO 10-2
42. Bundling generally involves selling distinct multiple items offered together at a special price.
ANS: T
PTS: 1
REF: p. 373
OBJ: LO 10-2
43. When a retailer heavily advertises a high-demand item that is priced low in an effort to attract
consumers into a store, the retailer is using leader pricing.
ANS: T
PTS: 1
REF: p. 374
OBJ: LO 10-2
44. An item that is sold below a retailers cost is known as a loss leader.
ANS: T
PTS: 1
REF: p. 374
OBJ: LO 10-2
45. The practice of advertising a low-priced model of a shopping good to lure shoppers into a store is
called a trade up strategy.
ANS: F
PTS: 1
REF: p. 374
OBJ: LO 10-2
46. Retailers that wish to have greater pricing freedom are likely to carry private brands because
consumers find it difficult to make exact comparisons between private brands and national brands.
ANS: T
PTS: 1
REF: p. 375
OBJ: LO 10-2
47. Markup is the difference between the cost of the merchandise and the selling price.
ANS: T
PTS: 1
REF: p. 375
OBJ: LO 10-3
48. Markup should cover operating expenses and produce a profit for the retailer.
ANS: T
PTS: 1
REF: p. 376
OBJ: LO 10-3
49. Markup may be expressed only as a percentage of the selling price or cost.
ANS: F
PTS: 1
REF: p. 376
OBJ: LO 10-3
50. A retailer has a cost per unit of $22 on a pair of pants and a selling price of $38. The markup equals
$22.
ANS: F
PTS: 1
REF: p. 376
OBJ: LO 10-3
51. Markup percentages are most useful to a retailer when expressed as a percentage of cost rather than as
a percentage of selling price.
ANS: F
PTS: 1
REF: p. 376
OBJ: LO 10-3
52. A percentage markup of 50 percent on selling price would be the same as a 50 percent markup on cost.
ANS: F
PTS: 1
REF: p. 376
OBJ: LO 10-3
53. A percentage markup of 32 percent on selling price would be the same as a 47.1 percent markup on
cost.
ANS: T
PTS: 1
REF: p. 376
OBJ: LO 10-3
54. A markup of 100 percent based on cost is the same as a 50 percent markup based on selling price.
ANS: T
PTS: 1
REF: p. 376
OBJ: LO 10-3
55. A markup of 70 percent based on cost is the same as a 41 percent markup based on selling price.
ANS: T
PTS: 1
REF: p. 376
OBJ: LO 10-3
56. If we know the markup on selling price, we can easily find markup on cost, even if we do not know the
dollar amount involved.
ANS: T
PTS: 1
REF: p. 376
OBJ: LO 10-3
57. The initial markup is equal to the achieved markup.
ANS: F
PTS: 1
REF: p. 378
OBJ: LO 10-3
58. A retailers maintained markup is usually lower than the retailers initial markup.
ANS: T
PTS: 1
REF: p. 378
OBJ: LO 10-3
59. Maintained markup is the actual selling price of an item minus its cost.
ANS: T
PTS: 1
REF: p. 378
OBJ: LO 10-3
60. Reductions cause the difference between a retailers maintained markup and initial markup.
ANS: T
PTS: 1
REF: p. 378
OBJ: LO 10-3
61. Clerical error probably accounts for more stock shortages than theft.
ANS: T
PTS: 1
REF: p. 379
OBJ: LO 10-3
62. Employee and customer discounts are some of the reasons for the difference between initial and
maintained markup.
ANS: T
PTS: 1
REF: p. 379
OBJ: LO 10-3
63. Since initial markup is subject to change during the selling season, there is no reason the retailer
should carefully plan for it.
ANS: F
PTS: 1
REF: p. 379
OBJ: LO 10-3
64. The initial markup percentage for a retailer is equal to the sum of the retailers gross margin, alteration
costs, and reductions divided by the retailers net sales.
ANS: F
PTS: 1
REF: p. 379
OBJ: LO 10-3
65. As goods are sold through more retail outlets, their markup percentage should decrease.
ANS: T
PTS: 1
REF: p. 381
OBJ: LO 10-3
66. As handling and storage costs of merchandise increase, a retailers initial markup should decrease.
ANS: F
PTS: 1
REF: p. 381
OBJ: LO 10-3
67. An item that a buyer sees as being a risky purchase would be likely to have a higher-than-normal
markup percentage.
ANS: T
PTS: 1
REF: p. 381
OBJ: LO 10-3
68. A retailers markdown percentage is the amount of the reduction divided by the original selling price.
ANS: T
PTS: 1
REF: p. 381
OBJ: LO 10-4
69. Errors in buying occur on the demand side of the pricing equation.
ANS: F
PTS: 1
REF: p. 381
OBJ: LO 10-4
70. Failure by the buyer to inform the sales staff how the new merchandise relates to the current stock, ties
in with the stores image, and satisfies the needs of the stores target market is one of the most
common merchandising errors that retailers make.
ANS: T
PTS: 1
REF: p. 382
OBJ: LO 10-4
71. The most common merchandise error is carrying over seasonal or fashion merchandise into the next
merchandising season.
ANS: F
PTS: 1
REF: p. 382
OBJ: LO 10-4
72. To be effective, a retail buyer should never take a markdown.
ANS: F
PTS: 1
REF: p. 383
OBJ: LO 10-4
73. Markdowns taken early speed the movement of merchandise, and also generally enable the retailer to
take less of a markdown per unit to dispose of the goods.
ANS: T
PTS: 1
REF: p. 383
OBJ: LO 10-4
74. Early markdown policies force retailers to take more of a markdown per unit to move their
merchandise.
ANS: F
PTS: 1
REF: p. 383
OBJ: LO 10-4
75. An advantage of the early markdown policy is that it allows the retailer to replenish lower-priced lines
from the higher-priced ones that have been marked down.
ANS: T
PTS: 1
REF: p. 383
OBJ: LO 10-4
76. Markdowns are always the result of buyer errors.
ANS: F
PTS: 1
REF: p. 383
OBJ: LO 10-4
77. When a retailer uses a late markdown policy, the markdown should be at least 20 percent in order to
move the remaining units left in stock.
ANS: F
PTS: 1
REF: p. 384
OBJ: LO 10-4
78. A rule of thumb for markdowns is that prices should be marked down at least 20 percent in order for
the consumer to notice.
ANS: T
PTS: 1
REF: p. 384
OBJ: LO 10-4
79. The maintained markup percentage equals the retailers initial markup percentage minus its reduction
percentage multiplied by 100 percent minus its initial markup percentage.
ANS: T
PTS: 1
REF: p. 385
OBJ: LO 10-4
ESSAY
1. When making a pricing decision, what other factors should a retailer consider?
ANS:
Pricing is an interactive decision made in conjunction with the firms mission statement, goals and
objectives, strategy, operational management, and administrative management. When making pricing
decisions, retailers must remember that they are never going to be right every time. Pricing decisions
should be interactive. Specifically, the decision to price an item at a certain level should be related to
the retailers decisions on lines of merchandise carried, location, promotion, credit and check cashing,
customer services, desired store image, and legal constraints.
PTS: 1
REF: p. 357-363
OBJ: LO 10-1
2. Under what conditions should a retailer use a skimming rather than a penetration pricing objective?
ANS:
Penetration is a pricing objective in which price is set at a low level in order to penetrate the market
and establish a loyal customer base. The objective of profit maximization seeks to obtain as much
profit as possible. Retailers know that if they follow such a policy, they are inviting competitors to
enter the market. Thus, in general, a retailer should seek to set prices, not to get as much as possible
from each customer, but at a level conducive to build customer loyalty and withstand the competition.
However, in some cases, a retailer may have a temporary monopoly and want to take advantage of it.
This is when a retailer may use a skimming pricing strategy or trying to sell at the highest price
possible before settling on a more competitive level.
PTS: 1
REF: p. 365
OBJ: LO 10-1
3. What factors should a retailer consider when deciding whether to price above the market, price at
market levels, or price below the market?
ANS:
Pricing Below the Market: A below-market pricing policy is attractive to many retailers such as
discounters and warehouse clubs. The retailer who uses this policy benefits by discouraging some
competitors from entering a given trading area so as to avoid head-to-head battles. However, for
retailers to consistently price below the market and be profitable, they must concentrate on generating
gross-margin dollars per square foot of space, not the gross-margin percentage. Consequently, belowmarket retailers must always try to increase the sales per square foot of store space since they have
already reduced their markups.
Pricing at Market Levels: Competitive pricing involves a price zone, a range of prices for a particular
merchandise line that appeals to customers in a certain demographic group. Pricing at market levels is
extremely important for e-tailers given the ease with which consumers can compare prices across
different Internet retailers. Some small retailers such as mom-and-pop grocery stores and convenience
stores often stress convenience and service rather than price in their retailing mix. However, even in
these cases, it is important that ones prices not be too far out of line.
Pricing Above the Market: Certain market sectors are receptive to high prices because nonprice factors
are more important to them than price like outstanding service, high cost structure, and low sales
volume. Some other factors that permit retailers to price above market levels include the following:
merchandise offerings; services provided; convenient locations; and extended hours of operation.
PTS: 1
REF: p. 366-370
OBJ: LO 10-1
4. What is the difference between variable and flexible pricing?
ANS:
While variable pricing is used when differences in demand and cost force the retailer to change prices
in a fairly predictable manner, flexible pricing offers the same products and quantities to different
customers at different prices.
PTS: 1
REF: p. 370
OBJ: LO 10-2
5. Why is price lining used by some retailers?
ANS:
To simplify pricing procedures and help consumers make merchandise comparisons, some retailers
establish a specified number of price lines or price points for each merchandise category. Once the
price lines are determined, these retailers purchase goods that fit into each line. This is called price
lining. The monetary difference between the price lines should be large enough to reflect a value
difference to consumers. This makes it easier for the salesperson to either trade up or trade down a
customer. When retailers are limited to certain price lines, they become specialists in those lines. This
permits them to concentrate all their merchandising and promotional efforts on those lines, thus
defining their store image more clearly. In addition, they direct their purchases to vendors who handle
those lines. The vendors, in turn, provide favored treatment to their large-volume retailing customers.
Other advantages of price lining include buying more efficiently, simplifying inventory control, and
accelerating inventory turnover. From the shoppers perspective, it is easy to shop when price lining is
used because differences are perceived among the various price points.
PTS: 1
REF: p. 372
OBJ: LO 10-2
6. What pricing strategies can a retailer use to attract customers into the store?
ANS:
In order to attract customers into the store, a retailer may use any or the various pricing strategies such
as customary pricing, variable pricing, flexible pricing, one-price policy, price lining, odd pricing,
multiple-unit pricing, bundle pricing, leader pricing, bait-and-switch pricing, and private-label brand
pricing.
PTS: 1
REF: p. 370-375
OBJ: LO 10-2
7. Why do retailers generally express markups as a percentage of selling price?
ANS:
Markup may be expressed either as a dollar amount or as a percentage of either the selling price or
cost. It is most useful when expressed as a percentage of the selling price because it can then be used
in comparison with other financial data such as last years sales results, reductions in selling price, and
even the firms competition.
PTS: 1
REF: p. 376
OBJ: LO 10-3
8. Explain how a markup should be calculated and the various markup methods.
ANS:
Markup may be expressed either as a dollar amount or as a percentage of either the selling price or
cost. It is most useful when expressed as a percentage of the selling price because it can then be used
in comparison with other financial data such as last years sales results, reductions in selling price, and
even the firms competition. The equation for expressing markup as percentage of selling price is:
Percentage of markup on selling price = (SP - C)/SP = M/SP
When expressing markup as a percentage of cost, the equation is:
Percentage of markup on cost = (SP - C)/C = M/C
When we know markup on cost, there is an equation to find markup on selling price:
Percentage of markup on selling price = Percentage of markup on cost/(100% + Percentage of markup
on cost)
When we know markup on selling price, we can easily find markup on cost:
Percentage of markup on cost = Percentage of markup on selling price/(100% - Percentage of markup
on selling price)
PTS: 1
REF: p. 376-377
OBJ: LO 10-3
9. What general rules should a retailer know when planning initial markups?
ANS:
In planning initial markups, some of the general rules of markup determination are summarized as
follows:
As goods are sold through more retail outlets, the markup percentage decreases. On the other
hand, selling through few retail outlets means a greater markup percentage.
The higher the handling and storage costs of the goods, the higher the markup.
The greater the risk of a price reduction due to the seasonality of the goods, the greater the
magnitude of the markup percentage early in the season.
The higher the demand inelasticity of price for the goods, the greater the markup percentage.
PTS: 1
REF: p. 381
OBJ: LO 10-3
10. What type of errors can a retailer make that will later cause the retailer to take a markdown?
ANS:
The four basic errors a retailer can make are: (1) buying errors, (2) pricing errors, (3) merchandising
errors, and (4) promotion errors.
Buying Errors: Errors in buying occur on the supply side of the pricing question. They result when the
retailer buys the wrong merchandise or buys the right merchandise in too large a quantity. Whatever
the cause of the buying error, the net result is a need to cut the price to move the merchandise.
Pricing Errors: These errors occur when the price of the item is too high to move the product at the
speed and in the quantity desired. An overly high price is often relative to the pricing behavior of
competitors. Perhaps, in principle, the price would have been acceptable, but if competitors price the
same item substantially lower, then the original retailers price becomes too high.
Merchandising Errors: Failure by the buyer to inform the sales staff of how the new merchandise
relates to the current stock, ties in with the stores image, and satisfies the needs of the stores target
market is the most common merchandising error. Another mistake is the failure to keep the department
manager and sales force informed about the new merchandise lines. Another merchandising error is
improper handling of the merchandise by the sales staff or ineffective visual presentation of the
merchandise. Mishandling errors include failure to stock the new merchandise behind old merchandise
whenever possible or simply misplacing the merchandise.
Promotion Errors: Even when the right goods are purchased in the right quantities and are priced
correctly, the merchandise often fails to move as planned. In this situation, the cause is most often a
promotion error. The consumer has not been properly informed or prompted to purchase the
merchandise. The advertising, personal selling, sales-promotion activities, or in-store displays were too
weak or sporadic to elicit a strong response from potential customers.
PTS: 1
REF: p. 381-383
OBJ: LO 10-4
11. Retailers find it advantageous to develop a set markdown timing policy. Explain the advantages and
disadvantages of early and late markdown policies.
ANS:
Early Markdown Policy: Most retailers who concentrate on high inventory turnover pursue an early
markdown policy. Markdowns taken early speed the movement of merchandise and also generally
enable the retailer to take less of a markdown per unit to dispose of the goods. Taking that early
markdown will allow the dollars obtained from selling the merchandise to be used to help finance
more salable goods. At the same time, the customer seems to benefit, since markdowns are offered
quickly on goods that some consumers still think of as fashionable, and the store has the appearance of
having fresh merchandise. Another advantage of the early markdown policy is that it allows the retailer
to replenish lower-priced lines from the higher ones that have been marked down.
Late-Markdown Policy: Allowing goods to have a long trial period before a markdown is taken is
called a late-markdown policy. This policy avoids disrupting the sale of regular merchandise by too
frequently marking goods down. As a consequence, customers will learn to look forward to a
semiannual or annual clearance in which all or most merchandise is marked down. Thus, the bargain
hunters or low-end customers will be attracted only at infrequent intervals.
PTS: 1
REF: p. 383-384
OBJ: LO 10-4