Chapter19 Solutions-Hansen6e

Chapter19 Solutions-Hansen6e - CHAPTER 19 PRICING AND...

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CHAPTER 19 PRICING AND PROFITABILITY ANALYSIS QUESTIONS FOR WRITING AND DISCUSSION 1. 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. 2. 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. 3. 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. 4. 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. 5. There are a number of possible reasons; here are two. First, interstate highway gas purchasers are often tourists. They do not have a long-term relationship with the gas station owner; therefore, the price charged may be higher. Second, the drivers may be able to choose among a larger number of competing gas stations in town. 6. 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. 7. Firms measure profit for a number of reas- ons. These include determining the viability of the firm, measuring managerial perfor- mance, and determining whether or not a firm adheres to government regulations. Regulated firms must measure profit to en- sure that they earn a rate of return, which stays within certain boundaries. Regulated firms typically have prices set for them. They must keep careful cost records to match with the prices to determine allowable profit. 8.
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This note was uploaded on 01/31/2011 for the course ACCT 360 taught by Professor N/a during the Spring '10 term at Mountain State.

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Chapter19 Solutions-Hansen6e - CHAPTER 19 PRICING AND...

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