Which of the following price adjustment strategies is designed to stabilize production for the selling firm?
Answer (D) is correct. Seasonal discounts are designed to smooth production by the selling firm. For example, a ski manufacturer offers seasonal discounts to retailers in the spring and summer to encourage early ordering.
Market-skimming pricing strategies could be appropriate when
Answer (B) is correct. Market-skimming pricing is used when a new product is introduced at the highest price possible given the benefits of the product. For market skimming to work, the product must appear to be worth its price, the costs of producing a small volume cannot be so high that they eliminate the advantage of charging more, and competitors cannot enter the market and undercut the price.
Which of the following pricing policies involves the selling company setting freight charges to customers at the actual average freight cost?
Answer (B) is correct. In uniform delivered pricing, the company charges the same price, inclusive of shipping costs, to all customers regardless of their location. This price is the company’s average actual freight cost Thus both nearby and distant customers are charged the same amount. This policy is easy to administer, permits the company to advertise one price nationwide, and facilitates marketing to faraway customers.
In which product-mix pricing strategy is it appropriate for the seller to accept any price that exceeds the storage and delivery costs for the product?
Answer (A) is correct. A by-product is a product of relatively minor importance generated during the production of one or more other products. Its production entails no additional costs. Any amount received above the storage and delivery costs for a by-product allows the seller to reduce the main product’s price to make it more competitive.
Several surveys point out that most managers use full product costs, including unit fixed costs and unit variable costs, in developing cost-based pricing. Which one of the following is least associated with cost-based pricing?
Answer (C) is correct. A target price is the expected market price of a product given the company’s knowledge of its customers and competitors. Hence, under target pricing, the sales price is known before the product is developed. Subtracting the unit target profit margin determines the long-term unit target cost. If cost-cutting measures do not permit the product to be made at or below the target cost, it will be abandoned.
If a U.S. manufacturer’s price in the U S market is below an appropriate measure of costs and the seller has a reasonable prospect of recovering the resulting loss in the future through higher prices or a greater market share, the seller has engaged in
Answer (C) is correct. Predatory pricing is intentionally pricing below cost to eliminate competition and reduce supply. Federal statutes and many state laws prohibit the practice. The U.S. Supreme Court has held that pricing is predatory when two conditions are met: (1) The seller’s price is below “an appropriate measure of its costs ” and it has a reasonable prospect of recovering the resulting loss through higher prices or greater market share.
Which one of the following will not occur in an organization that gives managers throughout the organization maximum freedom to make decisions?
Answer (C) is correct. Decentralization is beneficial because it creates greater responsiveness to the needs of local customers, suppliers, and employees. Managers at lower levels are more knowledgeable about local markets and the needs of customers, etc. A decentralized organization is also more likely to respond flexibly and quickly to changing conditions, for example, by expediting the introduction of new products. Furthermore, greater authority enhances managerial morale and development.
Disadvantages of decentralization include duplication of effort and lack of goal congruence.
The most fundamental responsibility center affected by the use of market-based transfer prices is a(n)
Answer (D) is correct. Transfer prices are often used by profit centers and investment centers. Profit centers are the more fundamental of these two centers because investment centers are responsible not only for revenues and costs but also for invested capital.
Transfer pricing should encourage goal congruence and managerial effort. In a decentralized organization, it should also encourage autonomous decision making. Managerial effort is the
Answer (D) is correct. Managerial effort is the extent to which a manager attempts to accomplish a goal. Managerial effort may include psychological as well as physical commitment to a goal.
A proposed transfer price may be based upon the outlay cost. Outlay cost plus opportunity cost is the
Answer (B) is correct. At this price, the supplying division is indifferent as to whether it sells internally or externally. Outlay cost plus opportunity cost therefore represents a minimum acceptable price for a seller. However, no transfer price formula is appropriate in all circumstances.