MyChapter_19 - CHAPTER 19 PRICING AND PROFITABILITY...

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CHAPTER 19 PRICING AND PROFITABILITY ANALYSIS QUESTIONS FOR WRITING AND DISCUSSION 1. If demand is relatively elastic, a price change of X% results in a quantity change of more than X%. If demand is relatively in- elastic, a price change of X% results in a quantity change of less than X%. Housing, postage for personal letters, and ice cream bars are examples of products with relatively elastic demand. Insulin, salt, and laser print- er toner cartridges are examples of products with relatively inelastic demand. 2. Perfectly competitive markets are character- ized by the following: many buyers and sellers—no one of which is large enough to influence the market; a homogeneous product (one company’s product is virtually identical to any other company’s product); and easy entry into and exit from the in- dustry. Commodity markets for agricultural products such as wheat, soybeans, and pork bellies are close to perfectly competit- ive. Similarly, gas stations in a city face competitive conditions. A gas station may try to differentiate itself to move to a more monopolistically competitive situation. For example, it might offer car washes, certain grocery staples, or full service. 3. The markup percentage on cost of goods sold is equal to selling and administrative expense plus desired operating income di- vided by cost of goods sold. The markup is not pure profit because it includes selling and administrative expense. 4. Target costing is a method of determining the cost of a product or service based on the price that customers are willing to pay. In essence, target costing is price driven. Once the target price is determined, the cost is calculated by subtracting desired profit from price. The remainder is the target cost. 5. Penetration pricing is the pricing of a new product at a low initial price, perhaps even lower than cost, to build market share quickly. Price skimming is a pricing strategy in which a higher price is charged at the be- ginning of a product’s life cycle and then lowered at later phases of the life cycle. 6. There are a number of possible reasons; here are three. First, the price difference may be cost based. If interstate locations are more expensive than lots in town, then the higher cost of operating on the interstate could result in a higher price. Second, inter- state highway gas purchasers are often tourists. They do not have a long-term rela- tionship with the gas station owner; there- fore, the price charged may be higher. Third, the price elasticity of demand for gas- oline purchased in town may be higher due to the larger number of competing gas sta- tions. 7. Price discrimination is the charging of differ- ent prices to different customers for essen- tially the same commodity. It is legal in some instances. For example, if price dis- crimination is necessary to meet competition or is based on cost differences in serving different customers, it is legal.
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This note was uploaded on 01/31/2009 for the course ACCOUNTING ACCT 470 taught by Professor Professorrajkiani during the Spring '08 term at California State University , Monterey Bay.

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MyChapter_19 - CHAPTER 19 PRICING AND PROFITABILITY...

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