Limiting Factors, Make-or-Buy Decisions

Question 1

💰 What is cost-plus pricing?

Answer 1

Setting price by adding a markup to the cost. E.g., a product costs $80, and the company adds a 25% markup → $80 + (25% of $80) = $100.

Question 2

✅ Advantage of cost-plus pricing?

Answer 2

Simple to apply and ensures costs are covered. E.g., used in construction contracts to ensure profit margin is secured.

Question 3

❌ Disadvantage of cost-plus pricing?

Answer 3

Ignores market demand and competition. E.g., if market price is $90 but cost-plus gives $100, product may be overpriced.

Question 4

📊 What is marginal cost pricing?

Answer 4

Setting price based on variable (marginal) cost only. E.g., if marginal cost = $15, product might be priced at $20 to gain market share.

Question 5

✅ When is marginal cost pricing useful?

Answer 5

In short-term decisions, e.g., selling excess capacity or special orders to utilize spare resources.

Question 6

🧠 What is target pricing?

Answer 6

Price is set based on what customers are willing to pay. E.g., if customers will pay $50, the firm works backward to control costs.

Question 7

✅ Advantage of target pricing?

Answer 7

Market-oriented and drives cost control. E.g., used in consumer electronics to stay competitive.

Question 8

❌ Disadvantage of target pricing?

Answer 8

May result in quality reduction to meet cost targets. E.g., using cheaper materials to meet price cap.

Question 9

💬 What is penetration pricing?

Answer 9

Low initial price to gain market share. E.g., Netflix charged low fees to attract users before gradually increasing price.

Question 10

📈 What is skimming pricing?

Answer 10

High initial price to maximize profit from early adopters. E.g., Apple prices new iPhones high initially.

Question 11

🎯 What is value-based pricing?

Answer 11

Based on perceived customer value. E.g., a luxury handbag might cost $50 to make but sells at $500 due to brand value.

Question 12

📉 What is competitor-based pricing?

Answer 12

Price is set according to competitors’ prices. E.g., petrol stations adjust prices based on nearby stations.

Question 13

🧾 What is price elasticity of demand?

Answer 13

Measures how demand changes with price. E.g., if price drops by 10% and demand rises by 20%, demand is elastic.

Question 14

📉 What does elastic demand imply?

Answer 14

Price changes greatly affect demand. E.g., reducing the price of luxury watches may greatly boost sales.

Question 15

📈 What does inelastic demand imply?

Answer 15

Price changes have little effect on demand. E.g., insulin prices may rise, but patients still buy it.

Question 16

💼 What are strategic pricing decisions?

Answer 16

Long-term pricing to support positioning. E.g., premium pricing maintains a luxury brand’s image.

Question 17

📦 What is bundle pricing?

Answer 17

Selling products together at a lower combined price. E.g., Microsoft Office includes Word, Excel, and PowerPoint at a discount.

Question 18

🔁 What is dynamic pricing?

Answer 18

Prices change in real time based on demand. E.g., Uber adjusts prices during peak times (surge pricing).

Question 19

💲 What is price discrimination?

Answer 19

Charging different prices to different customers. E.g., student or senior discounts at the cinema.

Question 20

📊 Numerical: If cost = $40 and markup = 30%, what is the selling price?

Answer 20

Selling Price = $40 + (30% × $40) = $52.

Question 21

🧮 Numerical: Target price = $90, desired profit = $20, what should be the target cost?

Answer 21

Target Cost = $90 - $20 = $70.

Question 22

🧠 What is the role of pricing in decision making?

Answer 22

Pricing impacts revenue, market share, and positioning. E.g., low prices may attract customers but reduce margins.

Question 23

📉 What risks are involved in pricing decisions?

Answer 23

Overpricing may reduce demand; underpricing may cause losses. E.g., setting software too low may harm brand perception.

Question 24

🔢 What is full cost pricing?

Answer 24

Includes both variable and fixed costs in pricing. E.g., $30 variable + $10 fixed cost = $40, add markup to price.

Question 25

📉 Disadvantage of full cost pricing?

Answer 25

Ignores demand and competitors. E.g., price may exceed market rate and reduce competitiveness.

Question 26

📊 What is break-even pricing?

Answer 26

Price set to cover total cost, no profit. E.g., price = $100, total cost = $100, profit = $0, just to survive.

Question 27

📈 What is psychological pricing?

Answer 27

Pricing to influence perception. E.g., setting price at $9.99 instead of $10.

Question 28

📉 What is loss leader pricing?

Answer 28

Selling below cost to attract customers. E.g., supermarkets discount milk to bring in foot traffic.

Question 29

✅ When to use loss leader pricing?

Answer 29

When you expect to make profits on other products. E.g., video game consoles sold cheap, but games are expensive.

Question 30

🧠 What is the contribution margin?

Answer 30

Selling price - variable cost. E.g., price = $100, VC = $60 → CM = $40.

Question 31

🧮 Numerical: If CM = $25 and fixed costs = $5,000, how many units to break even?

Answer 31

Break-even units = $5,000 / $25 = 200 units.

Question 32

📉 How can pricing affect brand image?

Answer 32

High price may imply premium quality; low price may suggest low quality. E.g., Rolex vs. cheap watches.

Question 33

🧠 Why consider customer value in pricing?

Answer 33

To avoid overpricing or underpricing. E.g., customers may pay more for convenience or service.

Question 34

💬 What is predatory pricing?

Answer 34

Setting very low prices to drive competitors out. E.g., big retailer undercuts local shops, risking anti-competition laws.

Question 35

📉 Risk of price wars?

Answer 35

Leads to reduced profit for all players. E.g., airlines repeatedly undercutting each other can hurt the industry.