MKT 300 1nd Edition Lecture 25 Outline of Last Lecture XLIV Chapter 16 Terms part 2 XLV Chapter 16 Concepts to Apply part 2 Outline of Current Lecture XLVI Chapter 17 Terms XLVII Chapter 17 Concepts to Apply Current Lecture XLVI Chapter 17 Terms Markup a dollar amount added to the cost of products to get the selling price Markup percent percentage of selling price that is added to the cost to get the selling price Markup Chain the sequence of markups firms use at different levels in a channel Determines the prices structure in the whole channel The markup is figured on selling price at each level of the channel Stockturn Rate the number of times the average inventory is sold in a year Average cost Pricing adding a reasonable markup to the average cost of a product Total Fixed Cost the sum of those costs that are fixed in total o matter how much is produced I e rent depreciations managers salaries property taxes and insurance Such costs stay the same even if production stops temporarily Total Variable Cost the sum of those changing expenses that are closely related to output i e Expenses for parts wages packaging materials outgoing freight and sales commissions At zero output total variable cost is zero Total Cost the sum of total fixed and total variable costs Changes in total cost depend on variations in total variable cost since total fixed cost stays the same Average Cost per unit obtained by dividing total cost by the related quantity that is the total quantity that causes the total cost Average Fixed Cost per unit obtained by dividing total fixed cost by the related quantity Average Variable Cost per unit obtained by dividing total variable cost by the related quantity These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Break even Analysis evaluates whether the firm will be able to break even that is cover all its costs with a particular price This is important because a firm must cover all costs in the long run or there is not much point in being in business Break even Point BEP the quantity where the firm s total cost will just equal its total revenue Fixed cost FC Contribution per Unit the assumed selling price per unit minus the variable cost per unit Value in use Pricing setting prices that will capture some of what customers will save by substituting the firm s product for the one currently being used Reference Price the price they expect to pay Leader Pricing setting some very low prices real bargains to get customers into retail stores The idea is not only to sell large quantities of the leading items but also to get customers into the store to buy other products Bait Pricing setting some very low prices to attract customers but trying to sell more expensive models or brands once the customer is in the store For example furniture advertises color TV for 199 but salespeople point out disadvantages of low priced TV and convince them to buy a more expensive set Psychological Pricing setting prices that have special appeal to target customers Dynamic Pricing Surge Pricing pricing based on demand Surge where demand is high Odd even Pricing setting prices that end in certain numbers For example poducts selling below 50 often end in the number 5 or 9 I e 24 95 For larger quantities 99 Price lining setting a few price levels for a product line and then marking all items at these pries This approach assumes that customers have acertain reference price in mind that they expect to pay for a product Neckties priced at 20 30 40 not 20 21 22 Main advantage is simplicity for salespeople and customers Sales may increase because 1 they can offer bigger variety in each price class and 2 easier to get customers to make decisions w in one price class Can also reduce costs because inventory is lower Demand backward Pricing setting an acceptable final consumer price and working backward to what a producer can charge Commonly used by producers of consumer products especially shopping products such as women s clothing and appliances market minus pricing Prestige Pricing setting a rather high price to suggest high quality or high status Want the best so will pay the most Used for luxury products such as furs jewelry and perfume Also in service industries where customer can t see the product in advance and relies on price to judge its quality Product bundle Pricing setting one price for a set of products Firms who do this usually set the overall price so that it s cheaper for the customer to buy the products at the same time than separately Encourages customers to buy products that they might not otherwise buy because the added cost of the extras is not as high as it would normally be so the value is better XVVII Chapter 17 Concepts to Apply 1 What is a markup How is a mark up percentage calculated in this book Why are there two methods a A markup is a dollar amount added to the cost of products to get the selling price Markup percent in this book is the percentage of selling price that is added to the cost tog et the selling price They are related to selling price for convenience One can also do a markup on cost but it s important to state clearly which markup percent you re using 2 Be able to calculate a mark up chain using both methods see videos and homework 3 What is the relationship between mark ups and stockturn How do retailers use this relationship a Some retailers and wholesalers try to speed turnover to increase profit even if it means reducing their markups 4 What are the advantages and disadvantages of average cost pricing a Advantages i A useful input to pricing decisions to understand how costs operate at different levels of output ii Average cost pricing is simple b Disadvantages i Easy to lose money if you don t sell as much as you expect to ii Doesn t consider cost variations at different levels of output 5 Know how to calculate a break even point in dollars and units a BEP in units Total fixed cost Fixed cost contribution per unit 6 Be able to identify basic variable and fixed costs a Fixed Costs rent depreciations managers salaries property taxes and insurance Such costs stay the same even if production stops temporarily b Variable Costs Expenses for parts wages packaging materials outgoing freight and sales commissions At zero output total variable cost is zero 7 What conditions affect price sensitivity a When customers have substitute ways of meeting a need b Value in