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Test Questions

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  5. Answer the following questions on the text.
  6. Answer the questions in writing.
  7. Ex. 4. Answer the receptionist's questions.
1. The break-even level of output in a firm can be found at the point at which:
A. Total Sales Revenues = Business Start-up Costs
B. Total Sales Revenues = Total Costs
C. Total Sales Revenues = Indirect Costs
D. Total Sales Revenues = Direct Costs
   
2. If a business plans for a ‘margin of safety’, it has planned to:
A. Increase its cash holdings in a bank account
B. Produce at the break-even level of output
C. Produce an output greater than break-even
D. Produce any output where sales revenue covers direct costs
   
3. A firm which produces wide-screen televisions has fixed costs of £500,000. The variable cost per TV is £500. If each TV is sold for £1,000, how many TVs must the firm produce and sell to break even?
  A. 5,000 B. 100 C. 1,000 D. 500
  Questions 4 and 5 are based on the following information: fixed costs per year = £30,000, variable cost per CD game = £15
4. If the firm produces 10,000 CD games, what will be the average cost per unit?
  A. £15 B. £5 C. £21 D. £18
5. If the firm plans to earn a contribution of £25 per unit sold, the price it must charge for each CD game will be:
  A. £ 40 B. £43 C. £50 D. £46
         
6. A firm produces and sells 40,000 units annually. Variable costs per unit are £2, while fixed costs total £100,000. If the firm adds a 20% mark-up for profit, each unit will sell for:
  A. £5.40 B. £4.50 C. £2.40 D. £3.00
         
7. Which of the following is unlikely to be an important objective of penetration pricing strategies?
A. Increasing market share
B. Launching a new product in a competitive market
C. Maximising sales revenue
D. Maximising short-term profit
   
8. You are a business manager in a large, well-established firm. A new firm has entered the market and threatens to reduce your market share. Which of the following pricing strategies would you advise your organisation to adopt in the short term?
A. Market skimming
B. Destroyer pricing
C. Price discrimination
D. Contribution pricing
   
9. · Suggest and explain a pricing strategy a firm could adopt to launch a new product. · How might established firms in the same market adapt their pricing strategies in the face of the new competition? · Using examples, explain the term ‘price discrimination’. · Explain why a holiday company may offer foreign holidays at bargain prices within a few days of their departure dates.
   
10. A small firm producing candles has fixed costs of 60,000 pounds per year and variable costs of 50 pence per candle. Each candle is sold for 2.50 pounds. · How many candles must the firm produce and sell each year to break even? How much profit would the firm earn if it produced and sold 80,000 candles each year? · Use the above mentioned information to draw a break-even graph for levels of output between 0 and 80,000 candles. Mark the area of profit and loss. · Explain, using examples, why break-even analysis and the use of break-even charts are so useful to new and existing businesses.

 

Case Study ‘What Price Promotion?’

You work for a newly created company which is about to launch a new type of canned soft drink into the soft drink market. Your managing director has asked you to consider and research possible short- and long-term pricing strategies for the new product.

You are to write up findings of your research and make recommendations in a full report. The document should be produced using a wordprocessor. A spreadsheet can be used to make calculations and generate graphs to import into your report where appropriate.

You have made the following list of tasks to complete before you begin to write up your report:

Tasks:

1. Set up a table in a spreadsheet with 6 columns and 6 rows. Label the columns in the first row in the following order: number of cans, fixed costs, total variable costs, total costs, total revenues (1), total revenues (2).

2. Calculate the total cost of producing a range of outputs from 0 to 2 million (in steps of 500,000 cans). Annual costs for the new drink are identified as follows:

· Fixed costs (incl. rent, rates, and overheads) £200,000

· Variable costs per can (labour and materials) £0.1

Complete columns 1 – 4 in the table accordingly.

Plot a total cost line on a graph. Remember to label the axes appropriately.

3. Calculate the average cost of producing each can of drink at each level of output. Choose an appropriate price per unit for your product to cover your costs of production and earn a reasonable level of profit at a given level of output.

4. Use your chosen price to calculate expected total revenues for sales of between 0 and 2 million cans. Use this information on total revenues to complete column 5 in the table. Also complete the graph started in task 3 and find the break-even level of output.

5. Confirm the break-even level of output from the graph using the algebraic equation:

TR=TC; TR= Price x Q; TC= FC+(VC x Q);

6. Investigate the range of prices offered by rival firms in the market. Write up the findings of your investigation and describe a possible pricing strategy to establish the new product in the market. Explain the possible reaction of competitors.

7. How, if at all, does the price per can chosen in task 7 differ from the chosen price in task 3? If the price differs, recalculate expected total revenues for a range of outputs above zero.

8. What is the impact of this new price on the break-even level of output? Show this on a new graph of total costs and total revenues for a range of outputs above zero.

9. Consider medium-term pricing objectives for when the product’s market position has been established. What pricing strategy could be adopted in the event of its losing market share to new competition? What would be the aim and likely effect of this strategy?

10. Write up your findings and recommendations in a report. This should include an explanation of why break-even analysis is useful to new and existing business organisations.

 


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