What is the service organization’s average cost for the printed tennis balls it buys from Sports Depot?Explain

Problem Set
Marketing Information

General Instructions: You must show your calculations and write a factual justification/analysis if asked.

1. (16 points) In Chapter 17 of your textbook, there is a list of different pricing objectives that a company can implement in pricing products. A brief description of four companies follow. For each company identify the pricing objective and state the facts that support your analysis.

A. Bella Computers earned a 6 percent return on investment this year and wants to
increase this to 9 percent next year. To its retailer customers, Bella Computers gives
cash discount terms of 2/10, net 30.

It also gives retailers a 3 percent reduction on the invoice amount for advertising Bella products locally. Bella gives retailers’ salespeople 2 percent of the sale price for each Bella Computer they sell.

B. Ross Pharmaceuticals has invested heavily in developing a new product that
recently received a patent. Because cash is tight, the company wants to achieve a
rapid return on its investment. The new patented product is badly needed in the
market, so a very inelastic demand curve is expected.

C. Digital Imaging makes photographic prints for wedding photographers. It is very
concerned about competitor reactions to its pricing, so it has selected prices that
will not draw the attention of the competition and will not start a price war. Digital
Imaging offers customers an 8 percent discount if their purchases exceed $20,000 a
year.

D. Jack’s One-Hour Cleaners recently opened for business. The company invested a lot
of money in new equipment and feels that it has to quickly get “at least 10
percent market share to stay in the game.

” This need obviously influences the company’s pricing decisions. Jack’s also plans to offer customers 20 percent discounts on any order over $20.

2. (10 points) The Robinson-Patman Act prohibits some forms of price discrimination while allowing others. Apply the Robinson-Patman Act to the following two scenarios and explain whether the company would or would not be in violation of the Robinson-Patman Act.

A. Jackson Motors, Inc. normally sells its electric motors to all buyers for $100.
However, a competitor offered to sell similar motors to one of Jackson Motors’
biggest customers for only $80 so Jackson Motors offered that customer—but not its
other customers—a $80 selling price.

B. Consolidated Motors Corp. agreed to lower its price per container for Higgins, one of its best customers, when Higgins agreed to purchase 1000 containers to be
delivered in 4 shipments over the next year.

The price was 30% lower than that offered to Consolidated’s other customers for similar contracts.

3. (8 points) Sports Depot’s is implementing a new strategy to increase sales of tennis balls.

The basic idea is to sell tennis balls in large quantities to nonprofit groups, who resell the balls to raise money. For example, a service organization at a local college bought 2,000 tennis balls printed with the college logo.

Sports Depot charged $.50 each for the tennis balls, plus a $500 one-time charge for the stamp to print the logo. The service group plans to resell the tennis balls for $2.50 each and contribute the profits to a shelter for the homeless.

A. What is the service organization’s average cost for the printed tennis balls it buys
from Sports Depot?

B. How many of the printed tennis balls must the service organization sell to cover the
$500 fixed printing charge?

4. (4 points) The following terms appeared on an invoice dated May 20, sent by a
manufacturer to a retail store: 2/10, net 30. The amount of the invoice was $2,000.
Assuming the retailer paid the invoice on May 30 (10 days after the products were
delivered), how much should he have paid?

5. (4 points) A large supermarket chain purchases a box of cereal from a food wholesaler. If the supermarket chain uses a markup of 20 percent on its selling price of $2.85, what is the price the supermarket chain paid to the food wholesaler?

6. (12 points) TopKnotch Mfg. Co. has a production cost of $280. It sells its product to a wholesaler for $400. The wholesaler then sells the item to retailers for $500 and the
retailers sell the item for $1,000.

A. What is the retailer’s markup percentage on selling price?
B. What is the wholesaler’s markup percentage on selling price?
C. What is the manufacturer’s markup percentage on cost?

7. (8 points) A producer with only one product has total fixed costs of $15,000 per month.

In addition, it cost the producer $100 in variable costs to produce each unit of her product (raw materials and direct labor cost). The producer charges her wholesalers $125 per unit.

A. How many units of the product does the producer have to sell each month in order
to break even?

B. The producer has set a target profit of $3,500 per month for this product. How
many units must be sold to break even and achieve the $3,500 per month?

8. (8 points) Randy Todd, marketing manager for Sporting Products, Inc. (SPI), is thinking about how changes taking place among retailers in his channel might impact his strategy.

SPI sells the products it produces through wholesalers and retailers. For example, SPI sells basketballs to Wholesale Supply for $8.00. Wholesale Supply uses a 20 percent markup on selling price, and most of its “sport shop” retailer customers, like Robinson’s Sporting Goods, use a 33 percent markup on selling price to arrive at the price they charge final consumers. What is the final selling price Robinson’s Sporting Goods charges for an SPI basketball?

9. (15 points) Kashi plans to offer a new line of healthy cereal. The cereal will come in
three variations: plain, with raisons, with dried cranberries. The manager has been
instructed to set the same price for the three variations even though the production costs differ.

Their research has estimated the following numbers for each variation:
Plain costs $1.10 to produce with projected sales of 15,000 boxes;

With Raisons costs $1.25 to produce with projected sales of 17,000 boxes; and

With Cranberries costs $1.45 to produce with projected sales of 12,000 boxes.

What will the manager recommend as the selling price if he uses average-cost pricing and a 30% markup on selling price to determine the price per box.

10. (15 points) Wilmington Sports Equipment Inc. started its business producing
equipment for tennis.

Although it is still known for its top-of-the-line tennis equipment, it has added sporting equipment for almost every sport (golf, football, basketball, soccer, etc.).

The R&D team at Wilmington is very excited about a new material for use in the production of tennis rackets. They think that this new material could be a game changer.

Wilmington has secured the patent on the new material and developed 2 prototypes to be
tested by well-known tennis players. Marketing is currently exploring different price
points for the new tennis rackets. They are $449, $399, and $329. Wilmington’s current
line of tennis rackets range in price from $69 (child’s racket) to $299 (professional quality).
The new racket will be priced much higher to reflect the higher quality and increased
production costs. The fixed costs associated with the new racket is $1,000,000 (much of
this is the cost to acquire the patent on the new material). The variable costs are $179 per
unit.

A. What is the breakeven point at each of the proposed prices?
B. Which price would you recommend and why?

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