Chapter 13—Designing Pricing Strategies and Programs
True/False Questions
1. Price is the only element of the marketing mix to produce revenue. True (moderate) p. 245
2. Price is one of the least flexible elements in the marketing mix. False (easy) p. 245
3. If a firm chooses the objective of current profit maximization, it essentially is ignoring the effect of
other elements of the marketing mix. True (moderate) p. 246
4. Nonprofits and public organizations may seek only partial cost recovery, rather than some profit
level. True (easy) p. 247
5. Fixed costs are costs that do not vary with production or sales revenue. True (easy) p. 248
6. The CEO’s salary is an example of a variable cost. False (moderate) p. 248
7. Consumers are likely to be more price sensitive when the cost is being borne by another party, and
when the product cannot be stored. False (moderate) p. 247
8. When a manufacturer varies its cost as a function of its differentiated marketing offers, the
manufacturer needs to use activity-based accounting. True (difficult) p. 250
9. Target costing focuses on trying to engineer costs before a new product has been introduced. True
(moderate) p. 250
10. One way of estimating the demand curve for your product is simply ask consumers how many units
they would buy at different proposed prices. True (moderate) p. 247
11. A decline in average production costs as the firm accumulates more experience is called the learning
curve. True (moderate) p. 249
12. Target costing requires determining the price consumers will pay before producing the good or
service. True (moderate) p. 250
13. Going-rate pricing is especially popular if costs are difficult to measure or competitive response is
certain. False (moderate) p. 253
14. A company that sells bottled water at a premium price is using a markup pricing strategy. False
(moderate) p. 250
15. In going-rate pricing, the firm bases its price largely on competitors’ prices. True (easy) p. 253
16. Retailers that employ everyday low pricing do not run price promotions. False (difficult) p. 253
17. Psychological pricing methods give groups of buyers a deal when they combine their orders. False
(moderate) p. 255
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18. A shoe store that carries pumps at $32, $52, and $82, and no other prices, is engaged in product-line
pricing. True (moderate) p. 260
19. When Toyota offers an Echo model that includes air, automatic transmission, a CD player, and
custom paint at a price below what the individual options would be priced at, it is an example of
product-bundle pricing. True (moderate) p. 260
Multiple Choice Questions
20. A common mistake in pricing is _______________.
a.) setting prices according to demand
b.) revising prices too often
c.) considering price and price competition as a key problem in marketing
d.) ignoring costs when setting prices
e.) setting prices independently of the rest of the marketing mix (difficult) p. 245
21. Scotty is in the process of opening Suburban Legends SK8S to sell boards, wheels, trucks, clothing,
videos, and skateboarding related collectibles. The first thing Scotty should do when setting the
store’s prices is to _______________.
a.) determine demand
b.) estimate costs
c.) determine her target market
d.) select a pricing method
e.) select a pricing objective (moderate) p. 245
22. A _______________ pricing objective is suitable for a company that has overcapacity, intense
competition, and changing customer needs.
a.) maximum current profit
b.) survival (moderate) p. 245
c.) maximum current revenue
d.) maximum sales growth
e.) partial cost recovery
23. Which of the following is not a common mistake in handling the pricing P?
a.) reliance on committee decisions about pricing (moderate) p. 245
b.) too cost-oriented
c.) not revised often enough to reflect market opportunities
d.) set independently of other marketing mix variables
e.) not varied enough
24. The introduction of a new product to the market using market-penetration pricing is most likely to be
successful when _______________.
a.) the unit costs of producing a small volume of the product are high
b.) there must be no existing demand for the product
c.) the market is highly price sensitive (difficult) p. 246
d.) the high price communicates nothing to the potential buyers
e.) competitors are not attracted to the market because there is no profit motivation
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25. When introduced in the late 1970s, personal computers had large initial demand. People were
interested in buying them to make writing and editing easier. The earliest simple PCs were initially
priced at around $2,500. The manufacturers of the first calculator were probably using a
_______________ pricing strategy.
a.) cost-oriented
b.) market-skimming (moderate) p. 246
c.) value-oriented
d.) market-penetration
e.) product-quality leadership
26. A market segment has a large number of buyers. High initial price does not attract competitors to the
market, but it communicates superior product image. In this segment a _______________ is the best
strategy.
a.) market-skimming pricing (difficult) p. 246
b.) product quality leadership
c.) maximum current revenue
d.) market-penetration pricing
e.) maximum sales growth
27. In 1991, Taco Bell began offering a 59-79-99 cents pricing strategy for its Mexican-themed fast food.
It did this by eliminating kitchens and having workers assemble food rather than cook it. Its costs fell
as it became more efficient, and the 59-79-99 pricing allowed to Taco Bell to take market share from
leaders McDonalds and Burger King. Taco Bell was using a _______________ pricing strategy.
a.) market-skimming
b.) product quality leadership
c.) maximum current revenue
d.) market-penetration (moderate) p. 246
e.) maximum sales growth
28. Buyers are more price sensitive when _______________.
a.) the product is significantly more distinctive than others on the market
b.) the expenditure is a small part of the total cost of the end product
c.) they are more aware of substitutes for the product (difficult) p. 247
d.) they cannot easily compare the quality of substitutes for the product
e.) the product is perceived to have more quality than others on the market
29. Demand is likely to be price elastic if _______________.
a.) there are many alternatives and direct substitutes for the product (difficult) p. 248
b.) buyers do not readily notice price changes
c.) buyers are slow to change their purchasing habits
d.) buyers think a higher price is justified by quality differences
e.) the buyers can use normal inflation to explain the price increase
30. _______________ are costs that do not vary with production or sales revenue.
a.) Total costs
b.) Average costs
c.) Variable costs
d.) Fixed costs (easy) p. 248
e.) Marginal costs
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31. Which of the following is an example of a fixed cost?
a.) a salesperson’s commission
b.) the portion of your phone bill that does not include long distance charges (moderate) p. 248
c.) delivery costs of a 3-ton refrigeration unit to Kennesaw, Georgia, and another one to Jacksonville,
Florida
d.) cost of the hiring process to employ a new vice-president of legal
e.) extra employees brought in to handle the holiday rush
32. Which of the following is an example of a fixed cost?
a.) the CEO’s bonus
b.) occasional charitable expenses donated by the firm
c.) mall rent based on percentage of sales
d.) monthly $2,000 payment on loan to buy earthmoving equipment (moderate) p. 248
e.) employees’ regular salaries as dictated by the union contract
33. _______________ consist of the sum of the fixed and variable costs for any given level of
production.
a.) Total costs (easy) p. 248
b.) Average costs
c.) Variable Costs
d.) Fixed Costs
e.) Marginal Costs
34. Every time Nike doubles the total number of shoes it has sold, its marketing cost structure falls by a
predictable percentage. This is an example of the _______________.
a.) leverage effect
b.) activity-based pricing concept
c.) experience curve (moderate) p. 249
d.) elasticity consumer exhibit for shoe prices
e.) target costing principle
35. Which of the following statements describes one of the risks inherent with experience-curve pricing
strategy?
a.) The aggressive pricing associated with this strategy might give the product a cheap image.
(difficult) p. 249
b.) This strategy is an offensive strategy against strong competitors that typically respond quickly to
its implementation.
c.) The strategy assumes competitors will respond with an even lower price.
d.) The strategy leads to expensive innovation, which might not payoff in the long run.
e.) The strategy is most efficient in industries where there is little growth potential.
36. When a manufacturer varies its cost as a function of its differentiated marketing offers, the
manufacturer needs to use _______________ accounting.
a.) standard cost
b.) value-added
c.) LIFO
d.) FIFO
e.) activity-based (moderate) p. 250
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37. When a firm is analyzing competitors in order to set its own prices, it needs to _______________.
a.) select its pricing method prior to that analysis
b.) benchmark its own costs against competitors (difficult) p. 250
c.) never set its price to be the same as its competitors
d.) know the benefits its target market wants
e.) assume its competitors will not change their prices
38. A maker of generic skateboard decks (blanks) for shops to customize incurs a variable cost of $12 per
blank and fixed costs of $500,000. To earn a 20 percent markup on selling price, the manufacturer
would charge _______________ for each of the 100,000 blanks it expects to sell.
a.) $14.40
b.) $20.40
c.) $21.25 (difficult) pp. 250-251
d.) $37.50
e.) $33.33
39. Lucinda is a maker of wine charms (small, decorative jewelry loops put on wineglass stems to set
your glass apart from those of other partiers), and has a variable cost of $4.50 per set of six and fixed
costs of $16,000. To earn a 25 percent markup on selling price, Lucinda should charge
_______________ for each of the 4,000 sets of charms she expects to sell.
a.) $5.63
b.) $6.38
c.) $8.63
d.) $9.63
e.) $11.33 (difficult) pp. 250-251
40. Jane Yellowhair makes small woolen handbags out of Pendleton blankets, and has fixed costs of
$30,000. She expects to sell 6,000 bags for $17.50. This price will give her a 20 percent markup.
Calculate the variable costs.
a.) $5.00
b.) $6.00
c.) $8.50
d.) $9.00 (moderate) pp. 250-251
e.) $10.00
41. Markup pricing is popular because _______________.
a.) sellers can determine demand more easily than they can determine costs
b.) it motivates manufacturing to find ways to cut costs
c.) it works especially well with product positioning strategies
d.) it considers the effects of current demand, perceived value, and competition on price
e.) many people feel cost-plus pricing is fairer to both buyers and sellers (difficult) p. 251
42. If an entrepreneur commits to her venture capitalists a goal of earning a 30 percent return on equity, it
would most likely use a _______________ pricing approach to setting price.
a.) markup
b.) psychological
c.) target-return (moderate) pp. 251-252
d.) going-rate
e.) perceived-value
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43. Burlingvale Coats produces winter wear for Target. Their recently designed parkas for the northern
stores cost about $30 to produce, and Burlingvale wishes to earn a 15 percent return on an investment
of $5 million. If 75,000 parkas will be sold to Target, the appropriate price per item is
_______________.
a.) $30.00
b.) $37.50
c.) $35.00
d.) $40.00 (moderate) pp. 251-252
e.) $45.00
44. Nixon Watch Co. (www.nixonnow.com) will incur fixed costs of $500,000 and unit variable costs of
$20 on its new perpetual calendar quartz model. Nixon plans to price the model at $50. To break
even, Nixon must sell _______________ units.
a.) 9,876
b.) 16,667 (moderate) p. 252
c.) 18,333
d.) 20,000
e.) 25,000
45. SunCrest Gardening Supply Company wants to sell a polystyrene window planter for $30. Its
variable costs for each planter are $12. To break even, SunCrest needs to sell 500 planters. Calculate
SunCrest’s fixed costs.
a.) $1,667
b.) $3,600
c.) $6,000
d.) $9,000 (moderate) p. 252
e.) $15,000
46. The price setting method most closely corresponding to the concept of product positioning is
_______________ pricing.
a.) markup
b.) psychological
c.) going-rate
d.) target-return
e.) perceived-value (easy) p. 253
47. A company that sells bottled water at a premium price is using a _______________ pricing strategy.
a.) markup
b.) target-return
c.) perceived-value (moderate) p. 253
d.) going-rate
e.) demographic
48. _______________ pricing is a method in which the company charges a fairly low price for a highquality offering.
a.) Markup
b.) Psychological
c.) Target-return
d.) Perceived-value
e.) Value (easy) p. 253
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49. When a wireless company advertises a low list price that includes free roaming, free weekends, and
free long distance as additions to the regular 400 monthly minutes for $35, it is using a
_______________ pricing strategy.
a.) markup
b.) psychological
c.) target-return
d.) perceived-value
e.) value (moderate) p. 253
50. Wal-Mart does not do frequent price-related promotions in favor of keeping the prices as low as
possible all the time—this is even reflected in their television advertising. This is an example of
____________ pricing.
a.) everyday low (easy) p. 253
b.) high-low
c.) going-rate
d.) auction-type
e.) value
51. In _______________ pricing, the firm bases its price largely on competitors’ prices.
a.) value
b.) target-return
c.) going-rate (moderate) p. 253
d.) perceived-value
e.) geographical
52. Baskin Robbins in Jackson Hole, Wyoming sells single-dip ice cream cones priced at roughly the
same price as single-dips at the Coldstone Creamery and Monk’s ice cream sellers downtown. This
information indicates that the Baskin Robbins store uses _______________ pricing.
a.) value
b.) target-return
c.) going-rate (moderate) p. 253
d.) perceived-value
e.) geographical
53. When customers buy on the basis of a reference price or because the price conveys a particular
quality image to them, they are being influenced by _______________.
a.) value pricing
b.) the psychology of pricing (moderate) p. 255
c.) the going-rates of competitors
d.) value augmented by perception
e.) an aggregated marketing plan for pricing
54. According to the research of Farris and Reibstein, how does the marketing mix influence a product’s
price?
a.) For products with high brand awareness, high advertising tends to support higher prices in
the later stages of the PLC. (difficult) p. 256
b.) High expenditures in advertising have little effect on the sales of a high-quality product.
c.) Consumers are willing to pay premium prices for unknown but quality products.
d.) The distribution element of the marketing mix has a significant impact on the price.
e.) The personal selling element of the marketing mix has little impact on price.
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55. Which of the following is not an important factor when considering the reactions of others to your
prices?
a.) How will competitors react?
b.) Will suppliers raise their prices when they see the company’s price?
c.) Will the government intervene and prevent the price from being charged?
d.) Will the sales force find the price motivating?
e.) Will the price cover your costs and meet company objectives? (moderate) p. 256
56. The form of countertrade that involves the direct exchange of goods, with no money and no third
party involved is called a(n)_______________.
a.) barter agreement (moderate) p. 257
b.) offset
c.) compensation deal
d.) buyback arrangement
e.) sellback arrangement
57. DaimlerChrysler gives technical advice on motor manufacturing to a Chinese firm, and in exchange
the firm provides DaimlerChrysler with natural rubber for gaskets and seals. This is an example of
a(n) _______________.
a.) barter agreement (moderate) p. 257
b.) offset
c.) compensation deal
d.) buyback arrangement
e.) sellback arrangement
58. In which of the following forms of countertrade would the seller receive full payment if the seller
agrees to spend a substantial amount of that money in that country within a stated time period?
a.) barter agreement
b.) offset (moderate) p. 257
c.) compensation deal
d.) buyback arrangement
e.) sellback arrangement
59. If a chipmaker gives personal computer makers a 2.5 percent discount for paying for their orders
within seven days instead of the standard 30 days, the chipmaker is providing them with a
_______________.
a.) functional discount
b.) quantity discount
c.) promotional price
d.) cash discount (moderate) p. 258
e.) trade allowance
60. A manufacturer of picture frame kits that expects its retailers to provide storage space for the kits
would likely offer a _______________.
a.) cash discount
b.) quantity discount
c.) functional discount (difficult) p. 258
d.) distribution allowance
e.) slotting allowance
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61. Every August, Fat Tire Ale hosts a bike race and beer tasting festival in Taos, New Mexico. During
the festival, local retailers offer _______________ pricing to entice people who come for the festival
to come into their stores and buy their merchandise.
a.) special-event (moderate) p. 259
b.) seasonal discount
c.) promotional allowance
d.) psychological discount
e.) functional discount
62. Professors and other professional members of the Association for Consumer Policy pay a different
membership renewal rate than student members. The Association for Consumer Policy uses
_______________ pricing.
a.) time
b.) customer-segment (moderate) p. 258
c.) service-form
d.) captive-market
e.) image
63. Passengers on a Delta Airlines flight from Charlotte, North Carolina, to Denver, Colorado, are paying
several different fares, depending on when they bought their tickets. In charging these prices, Delta
has engaged in _______________ pricing.
a.) time (easy) p. 258
b.) functional
c.) service-form
d.) captive-market
e.) image
64. The Dave Matthews Band plays a venue in Richmond, Virginia. The floor seats cost $48, the seats on
the edges but close run $36, and the seats in the balconies are priced at $30. This is an example of
__________ pricing.
a.) psychological
b.) image
c.) value-added
d.) perceived-value
e.) location (moderate) p. 258
65. While shopping at Parisian Department Store, you notice all of the neckties are priced at $18.50,
$25.00, or $45.00. Parisian is using _______________ pricing.
a.) product-line (moderate) p. 260
b.) price-quality
c.) optional-feature
d.) captive-product
e.) customer-segment
66. Onet, an Internet service provider (ISP), charges a membership fee and then a per hour usage charge
for access to the Internet. This is an example of which type of product-mix pricing strategy?
a.) captive-pricing
b.) product-line pricing
c.) byproduct pricing
d.) customer-segment pricing
e.) two-part pricing (moderate) p. 260
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67. You can buy inexpensive printers from Hewlett Packard with many different features, but when you
go to buy the toner cartridge refills, the price is often much higher than you expected. This example
describes _______________ pricing.
a.) product-line
b.) price-quality
c.) optional-feature
d.) captive-product (moderate) p. 260
e.) customer-segment
68. When renewing her subscription to Rolling Stone magazine, Guillermina was given the opportunity to
purchase a subscription to Spin magazine, to get a Rolling Stone travel umbrella, and to purchase a
membership in a discount music club all for one low price. The magazine publisher has engaged in
_______________ pricing.
a.) product-bundling (moderate) p. 260
b.) product-line
c.) by-product
d.) captive-product
e.) two-part
69. A manufacturer of industrial drill equipment needs to make a price adjustment. The firm is concerned
about the volatility of the price of industrial diamonds and forged steel that go into making its
products. This manufacturer’s best price adjustment strategy would be _______________.
a.) adoption of delayed quotation pricing
b.) use of escalator clauses (difficult) p. 262
c.) product bundling
d.) unbundling goods and services
e.) reduction of discounts
Essay Questions
70. Diamond Machine Technology makes a tool for sharpening the blades of pruning sheers and glass
clippers. The company has invested $250,000 in developing this sharpener. This tool, which is about
the size of a piece of chewing gum, costs $3 to make. Fixed costs for the sharpener is $10,000. The
company expects to sell 100,000 sharpeners this year. Diamond Machine’s markup on sales is 30
percent, and it wants to earn a 20 percent ROI. Calculate both its markup price and its target-return
price as well as its breakeven volume at both prices. Which price should Diamond Manufacturing
use?
Answer:
(difficult) pp. 250-252
71. Goldstar, a Korean manufacturer, has decided to make and market small (125cc-250cc) motorcycles
in the United States. Explain in detail the six-step procedure Goldstar should use setting the prices
for their products.
Answer:
The six steps are: 1) selecting the price objective; 2) determining demand; 3) estimating costs; 4)
analyzing competitors’ costs, prices, and offers; 5) selecting a pricing method; and 6) selecting the
final price.
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Each of these can be expanded upon, for example, there are five major objectives listed in the text:
survival, maximum current profit, seeking market share, market skimming, and product-quality
leadership.
a.) Goldstar’s early motivation might be to get a foothold in the market. This would be seeking
market share.
b.) Goldstar needs to determine the demand for small motorcycles in the United States. They might
do this by examining public records for motorcycle registrations and enrollments in Motorcycle
Safety Foundation courses.
c.) Goldstar must estimate its own costs to produce and move the motorcycles through the
distribution channel. This is effectively a “floor” to the price Goldstar can charge.
d.) Goldstar needs to understand the cost structures, prices charged, and offers by the competition in
the marketplace. Most small motorcycles sold in the United States are made by the “big four”
Japanese firms—Honda, Yamaha, Kawasaki, and Suzuki.
e.) Goldstar may want to follow its fellow Korean companies by entering the Unites States with a
value pricing strategy. There are certainly other options, including “going-rate” pricing and
markup pricing. A value strategy implies that the bikes would be of equal quality at lower prices
than the competition.
f.) Goldstar then needs to select the final prices for the bikes. The possible range is probably
between $800 and $2,200, depending on all the factors above, as well as the power of the
distributors in the channel.
(difficult) pp. 245-256
72. Mattel wishes to sell Barbie dolls in an area of the world where local currency cannot be converted
and local distributors are forbidden to hold any outside currencies. Explain the four ways in which
this challenge might be taken care of by Mattel using countertrade methods.
Answer:
The four methods are: barter, compensation deal, buyback arrangement, and offset.
a.) Mattel might use barter, by offering to trade straight across 100,000 Barbies for 35,000 bolts of
locally-manufactured textiles (which Mattel would then sell in another marketplace for cash).
b.) Mattel might use a compensation deal, wherein they accept some local currency to be used when
Mattel executives travel in the country, and the rest of the deal is paid in products, such as the
textiles mentioned above.
c.) Mattel might use a buyback arrangement, in which they fund a small production facility in the
country, and agree to be paid back over time in dolls produced there, rather than in currency.
d.) Mattel could use the offset method, by accepting full payment in the nonconvertible currency and
then immediately or over time spending that currency in the country for other exportable goods
which Mattel could then resell.
(moderate) p. 257
73. A U.S. condiment manufacturer wants to market its product internationally, but its marketing director
is concerned about countertrading. What you can tell her about countertrading? Which forms should
she expect to have to deal with if she plans on selling her products to Eastern Europe?
Answer:
American companies are often forced to engage in countertrading if they want to do business in
certain countries. Countertrades may account for 15 to 20 percent of world trade and take the
following forms: (1) Barter is the direct exchange of goods with no money and no third-party
involvement. (2) In a compensation deal, the seller receives some percentage of the payment in cash
and the rest in products. (3) In a buyback arrangement, the seller sells a plant, equipment, or
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technology to another country and agrees to accept as partial payment products manufactured with the
supplied equipment. (4) In an offset, the seller receives full payment in cash but agrees to spend a
substantial amount of that money in the buying country within a stated period of time. The marketing
director can expect to deal with all of the above except a buyback arrangement.
(moderate) p. 257
74. Provide an explanation and examples of the ways in which a firm might use discriminatory pricing.
When does price discrimination work?
Answer:
The text provides examples of six ways in which discriminatory pricing could be carried out:
customer-segment pricing, product-form pricing, image pricing, channel pricing, location pricing, and
time pricing.
a.) Customer-segment pricing means that the customer groups have something different about them,
such as charging less for senior citizens at movies versus what the general public has to pay.
b.) Product-form pricing means that you price different forms of the same product differently. For
example, you might charge more per ounce for laundry detergent, depending on the total amount
purchased.
c.) With image pricing, the seller can actually sell the same product packaged differently for
different prices. This happens with tires—tire-makers sell their own brands, and sell the very
same tire with a different brandmark for another price, due to the difference in prestige of the
brands offered.
d.) Distributing product at different locations is another opportunity to discriminate in pricing. As an
example, popcorn sold at the movies is priced much higher than popcorn sold at a school fair.
e.) Using different channels affords the opportunity to charge different prices. A bottle of beer at the
grocery store might cost $1, whereas when the same amount of beer is sold either in a bottle or on
tap at a bar, the price might double or even triple.
f.) Airlines use time pricing to discriminate in prices to different customers. They vary the price
according to day of the week and time of day, as well as using other factors to help them fill the
maximum amount of seats.
Discrimination works when: (1) the market is segmentable and different segments have different
levels of demand; (2) those who qualify for the lower costs cannot resell to those that do not; (3)
competitors cannot undersell the higher prices; (4) the cost of segmenting doesn’t exceed the
additional revenue derived by discrimination; (5) customers are not antagonistic because of the
differences, and; (6) the discrimination is not illegal.
(moderate) pp. 257-259
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Mini-Cases
Mini-Case 13-1
Fugazi is a punk band from Washington, DC. The leader, Ian, insists that the band not focus on the
commercial aspects of making music, so the band typically charges no more than $6 for a live show, they
sell no tee-shirts or other Fugazi gear, and they will only play in all-ages venues. To increase creative and
financial control, Ian and other members of the band package and sell their self-produced CDs, which
they sell for $10 online.
75. Refer to Mini-Case 13-1. When it comes to pricing their music, Fugazi uses the ________ method.
a.) value (moderate) p. 253
b.) going-rate
c.) markup
d.) skimming
e.) target-return
76. Refer to Mini-Case 13-1. The underlying objective or philosophy used by Fugazi in setting their
prices is probably
a.) survival—in this case, keeping the band “alive”
b.) maximum current profit—using the strict definition in the book
c.) maximum market share—in this case, getting as many people to listen to the band as
possible (moderate) p. 246
d.) market skimming—using the strict definition in the book
e.) product-quality leadership—the logic being that offering the best music possible will cost more
than providing average-quality music
77. Refer to Mini-Case 13-1. Every time Fugazi tours, they are able to pick up more ideas about how to
minimize the costs of going on tour, in order to make a fair and increasing return for their efforts.
This is an example of _______________.
a.) total costs falling
b.) activity-based accounting
c.) target costing
d.) the learning curve (moderate) p. 249
e.) consideration of customers’ demand schedules
Mini-Case 13-2
According to an article in the March 1935 issue of Fortune magazine, cement as we know it today first
appeared in 1872. In 1890, 336,000 barrels were produced. In 1910, it was 76,500,000 barrels. By 1929,
the concrete industry was producing 169,000,000 barrels annually. Cement’s growth was directly linked
to the construction of roadways for the automobile. Because of its primary usage, there were strict
regulations developed as to its content. As a result, the only way that one cement manufacturer differed
from another was price.
While a cement maker at the time might contend that its cement was superior to the others on the market
(and most of them made this contention), no cement company was able to translate this added value into
price. Another distinguishing characteristic of the cement industry was the ratio between a company’s
selling price and its transportation costs. A barrel of cement weighed 376 pounds and cost $.42 to ship 50
miles. Fixed costs for International Cement Company (just 50 miles west of New York City) in 1935
were $64,000,000. Much of International Cement’s products were sold in New York City, where cement
sold for $2.40 regardless of how far away it was manufactured. Variable manufacturing costs per barrel
were $.70; it takes 600 pounds of ingredients to make one barrel.
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78. Refer to Mini-Case 13-1. Buyers of cement were very price sensitive because _______________.
a.) there were no brands that appeared to be superior to any others (difficult) p. 247
b.) there were no substitutes for cement
c.) the purchase of cement was not a large part of the total cost of building a road
d.) the cement can be easily compared because of the requirement that every bag of cement meets the
specifications set out by the American Society for Testing Materials
e.) cement can be easily stored
79. Refer to Mini-Case 13-1. Calculate the break-even volume in barrels for the International Cement
Company.
a.) 17,679,559
b.) 26,666,667
c.) 37,647,059
d.) 50,000,000 (moderate) p. 252
e.) 152,380,953
80. Refer to Mini-Case 13-1. What type of pricing structure was being used in the cement industry in
1935?
a.) value
b.) going-rate (moderate) p. 253
c.) markup
d.) perceived-value
e.) target-return
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