in a few years. With a large portion of their expenses in the development area, budgeting can assist in predicting the sales needs for the entire life of a product. It is probably more important to evaluate company performance on a product basis rather than year to year. Life-cycle budgeting would allow the company to compare products to each other rather than just comparing one year to the next. 164. What factors may influence the level of markups? Answer: Factors affecting the level of markups include the strength of demand, the elasticity of demand, and the intensity of competition. In addition, strategic reasons also may influence the level of markups. For instance, a firm may either choose a low markup to penetrate the market and win market share from established products of its competitors, or employ a high markup if it employs a skimming strategy for a market segment in which some customers are willing to pay higher prices for the privilege of owning the product. 5, 7 Objectives: 165. A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices be adjusted during peak periods? During slow times? Why? Answer: During peak periods the hotel can justify increased prices because of full capacity conditions, whereas in slower periods when there is excess capacity, the hotel may want to lower prices to fill the excess capacity. 166. Clark Manufacturing offers two product lines, IN2 and EL5. The demand of the IN2 product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits? Answer: For the inelastic product line, when prices are increased demand will stay approximately the same and profits would be expected to increase. For the elastic product line, the increased will result in decreased demand (i.e., lower sales volume). Whether a profit or a loss results from this change will depend on
in a few years. With a large portion of their expenses in the development area, budgeting can assist in predicting the sales needs for the entire life of a product. It is probably more important to evaluate company performance on a product basis rather than year to year. Life-cycle budgeting would allow the company to compare products to each other rather than just comparing one year to the next. 164. What factors may influence the level of markups? Answer: Factors affecting the level of markups include the strength of demand, the elasticity of demand, and the intensity of competition. In addition, strategic reasons also may influence the level of markups. For instance, a firm may either choose a low markup to penetrate the market and win market share from established products of its competitors, or employ a high markup if it employs a skimming strategy for a market segment in which some customers are willing to pay higher prices for the privilege of owning the product. Objectives: 5, 7 165. A hotel in Orlando, Florida, experiences peak periods and slower times. How should prices be adjusted during peak periods? During slow times? Why? Answer: During peak periods the hotel can justify increased prices because of full capacity conditions, whereas in slower periods when there is excess capacity, the hotel may want to lower prices to fill the excess capacity. 166. Clark Manufacturing offers two product lines, IN2 and EL5. The demand of the IN2 product line is inelastic, while the demand of the EL5 product line is very elastic. If Clark initiates a price increase for both product lines, how will customer demand change? How will the price increase affect operating profits? Answer: For the inelastic product line, when prices are increased demand will stay approximately the same and profits would be expected to increase. For the elastic product line, the increased will result in decreased demand (i.e., lower sales volume). Whether a profit or a loss results from this change will depend on
Ch12%20Pricing%20Decisions%20and%20Cost%20Management%20Test.docx