2. 1.Discuss the role of cost and demand factors in setting a price. 2.Apply break-even analysis and markup pricing. 3.Identify specific pricing strategies. 4.Explain the benefits of credit, factors that affect credit extension, and types of credit. 5.Describe the activities involved in managing credit. 16–2 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Setting a Price PricePrice  A specification of what a seller requires in exchange for transferring ownership or use of a product or service.  Prices set too low, loss in revenue  Price set too high, loss in revenue  Price and demand are related for many goods and services CreditCredit  An agreement between a buyer and a seller that provides for delayed payment for a product or service. 16–3 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Price Changes Affect Revenues © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16–4 Situation A Quantity sold x Price per unit = Gross revenue 250,000$3.00$750,000 Situation B Quantity sold x Price per unit = Gross revenue 250,000$2.80$700,000 Difference in Revenue $50,000

5. Cost Determination for Pricing Total CostTotal Cost  The sum of cost of goods sold, selling expenses, and overhead costs. Variable CostsVariable Costs  Costs that vary with the quantity produced or sold. Fixed CostsFixed Costs  Costs that remain constant as the quantity product or sold varies. Average PricingAverage Pricing  An approach in which total cost for a given period is divided by quantity sold in that period to set a price. 16–5 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. 16–6 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Structure of a Hypothetical Firm, 2013 16.1

7. 16–7 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Structure of a Hypothetical Firm, 2014 Average pricing overlooks the reality of higher average costs at lower sales levels 16.2

8. How Customer Demand Affects Pricing Elasticity of DemandElasticity of Demand  The degree to which a change in price affects the quantity demanded.  Elastic Demand  Demand that changes significantly when there is a change in the price of the product.  Inelastic Demand  Demand that does not change significantly when there is a change in the price of the product. 16–8 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Demand Price Elastic Inelastic

9. Pricing and Competitive Advantage Pricing and a Firm’s Competitive AdvantagePricing and a Firm’s Competitive Advantage  Customers will demand and pay more for a product or service that they perceive as important to their needs. Prestige PricingPrestige Pricing  Setting a high price to convey an image of high quality or uniqueness (competitive advantage).  Customers associate price with quality.  Markets with low levels of product knowledge are candidates for prestige pricing. 16–9 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Applying a Pricing System Break-Even AnalysisBreak-Even Analysis  A comparison of alternative cost and revenue estimates in order to determine the acceptability of each price.  Steps in the analysis  Examining revenue-cost relationships: the quantity at which the product will generate enough revenue to start earning a profit. 16–10 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Break-even units sold = total fixed costs and expenses selling price – unit variable costs and expenses

11. units 16–11 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Break-Even Graphs for Pricing 16.3

12. Applying a Pricing System (cont’d) Examining Cost and Revenue RelationshipsExamining Cost and Revenue Relationships  Breakeven point  The sales volume at which total sales revenue equals total costs (fixed and variable)—the point at which profitability starts and losses cease.  Contribution margin  The difference between the unit selling price and the unit variable costs and expenses. Incorporating Sales ForecastsIncorporating Sales Forecasts  Adjusted Break-Even Analysis  Price has a variable impact and influence on demand.  Adjusting for the indirect effect of price allows for a more realistic profit area to be identified. 16–12 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. 16–13 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A Break-Even Graph Adjusted for Estimated Demand 16.4

14. Applying a Pricing System (cont’d) Markup PricingMarkup Pricing  Cost plus pricing system that adds a markup percentage to cover:  Operating expenses  Subsequent price reductions  Desired profit 16–14 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Retail adage: Markup on purchased cost, markdown on selling price

15. Selecting a Pricing Strategy © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16–15 Penetration Pricing Follow-the- Leader Pricing Dynamic Pricing What the Market Will Bear: Adaptive Pricing Price Lining Variable Pricing Skimming Pricing Pricing Strategies

16. Selecting a Pricing Strategy (cont’d) Setting Prices: Controls and SituationsSetting Prices: Controls and Situations  The Sherman Antitrust Act generally prohibits competitors from conspiring to fix prices.  The effect of the introduction of new products into an established product line.  Offering discounts to match the needs of customers.  If the initial price appears to be off target, make any necessary adjustments and keep on selling! 16–16 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Offering Credit Benefits of Credit to BorrowersBenefits of Credit to Borrowers  Provides working capital  Ability to satisfy immediate needs and pay later  Better records of purchases on credit billing  Better service and greater convenience when exchanging purchased items  Establishment of credit history 16–17 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Offering Credit (cont’d) Benefits of Credit to SellersBenefits of Credit to Sellers  Facilitates increased sales volume.  Brings a closer association with customers.  Fosters easier selling through telephone, mail and over the Internet.  Helps smooth sales demand since purchasing power is always available.  Provides easy access to a tool with which to stay competitive. 16–18 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Selling on Credit © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16–19 Type of business Economic conditions Credit policies of competitors Factors that Affect Selling on Credit Income level of customers Availability of working capital

20. Types of Credit Consumer CreditConsumer Credit  Financing granted by retailers to individuals who purchase for personal or family use. Trade CreditTrade Credit  Financing provided by a supplier of inventory to a given company which sets up an account payable for the amount.  Terms of sale may be 2/10, net 30—two percent discount on the invoiced amount if paid in full within 10 days of the invoice date, otherwise the full invoice amount is due in 30 days. 16–20 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. Types of Consumer Credit Accounts Open Charge AccountOpen Charge Account  Is a line of credit that allows the customer to obtain a product at the time of purchase. Installment AccountInstallment Account  Is a line of credit that requires a down payment, with the balance paid over a specified period of time. Revolving Charge AccountRevolving Charge Account  Is a line of credit on which the customer may charge purchases at any time, up to a pre-established limit. 16–21 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Types of Credit Cards Bank Credit and Debit CardsBank Credit and Debit Cards  Are issued by banks that are widely accepted by retailers who pay a fee to the banks for handling their credit transactions. Travel and Entertainment Credit CardsTravel and Entertainment Credit Cards  Were originally used to purchase services, now widely accepted for merchandise. Retailer Credit CardsRetailer Credit Cards  Are issued by firms for specific use in their retail outlets or for purchasing their products or services. 16–22 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. Managing the Credit Process Evaluation of Credit ApplicantsEvaluation of Credit Applicants  Can the buyer pay as promised?  Will the buyer pay?  If so, when will the buyer pay?  If not, can the buyer be forced to pay? The Traditional Five C’s of CreditThe Traditional Five C’s of Credit  Character  Capacity  Capital  Collateral  Conditions 16–23 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Sources of Credit Information IndividualsIndividuals  Customer’s previous credit history  Credit information exchanges BusinessesBusinesses  Financial statements of the firm  Other sellers to the firm  Firm’s banker  Trade-credit agencies  Credit bureaus  Online credit data 16–24 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. 16–25 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Hypothetical Aging Schedule for Accounts Receivable 16.5

26. Managing the Credit Process (cont’d) Billing and Collection ProceduresBilling and Collection Procedures  Timely notification is a most effective collection method for keeping bills current.  Warning consumers that they may do damage to their credit if they fail to pay. Bad Debt RatioBad Debt Ratio  A number obtained by dividing the amount of bad debts by the total amount of credit sales. 16–26 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Credit Regulation The Truth-in-Lending Act (1968)The Truth-in-Lending Act (1968) The Fair Credit Billing ActThe Fair Credit Billing Act The Fair Credit Reporting ActThe Fair Credit Reporting Act The Equal Credit Opportunity ActThe Equal Credit Opportunity Act The Fair Debt Collection Practices ActThe Fair Debt Collection Practices Act 16–27 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. Key Terms adaptive pricing aging schedule average pricing bad-debt ratio break-even analysis break-even point consumer credit contribution margin credit bureaus credit card credit debit card elastic demand elasticity of demand follow-the-leader pricing strategy inelastic demand installment account markup pricing open charge account penetration pricing strategy prestige pricing price lining strategy revolving charge account skimming price strategy trade credit trade-credit agencies value variable pricing strategy 16–28 © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.