Erica wants to buy Marco’s used iPod. He is asking her to pay him $100 for it. $100 is the iPod’s

• cost of goods.

• selling price.

• cash flow.

• profit.

Answer explanation

Selling price is the amount a seller charges for a good or a service. In this case, $100 is the selling price for Marco’s iPod. Cash flow is the movement of funds into and out of a business. Cost of goods is the cost to the business of obtaining products for resale. Profit is the funds a business has left from its sales income after paying its costs
and expenses.

Which of the following is a true statement:

• Only certain types of products have selling prices.

• Selling prices are easy for businesses to determine.

• Selling prices for products always remain the same over time.

• There are many kinds of selling prices for goods and services.

Answer explanation

All products have selling prices. Some examples other than prices for tangible products would be tuition, insurance premiums, and bus fares. It is not an easy process for a business to determine the best
selling price for its products, because many factors must be considered. Most selling prices fluctuate rather than stay the same over time.

The selling prices of products help customers

• make buying decisions.

• find a company’s fixed costs.

• spend freely.

• determine the amount of markup.

Answer explanation

Most customers feel that price indicates quality and use selling price as a guide to select the products they buy. Selling price does not provide customers with enough information to allow them to determine how much markup or fixed costs
are included in an item’s price. Whether a customer spends freely is determined by the amount of money they have to spend.

Selling price helps customers allocate their money because price determines

• what customers need to purchase.

• the value of products to all purchasers.

• what customers can afford to purchase.

• the quality of all goods and services.

Answer explanation

. Selling price helps customers decide which items they can afford and which ones are too expensive and allocate their funds accordingly.
The value of products is not the same to all purchasers, because their needs are different. The quality of products is determined by the nature of the products themselves, not by
their prices.

It costs a publishing company $8 to produce a paperback book. The company sells each
paperback it produces for $9.99. The $1.99 difference is known as

• capital

• markup

• demand

• elasticity

Answer explanation

Markup is the amount added to the cost of a product to create a selling price
that will enable the business to recover its costs and make a profit. Capital refers to all the
assets of a business. Demand is the quantity of a good or service that buyers are ready to buy at a given price at a particular time. Elasticity is an indication of how changes in price will affect changes in the amounts demanded and supplied.    

Which of the following is true of a business’s pricing objectives:

• They must be changed each fiscal year.

• They must be adjusted from time to time.

• They are chosen for the life of the business.

• They are not affected by changing circumstances.

Answer explanation

As circumstances inside and outside the business change, or the business changes its goals, pricing objectives may also need to be changed. There is no set time at which this may be necessary, such as at the beginning of each fiscal or business year.

A business that uses sales-oriented pricing objectives wants to increase the

• cost of its marketing efforts.

• total amount of its income from sales.

• amount of promotion it uses.

• inefficiency of its human resources.

Answer explanation

The purpose of sales-oriented pricing objectives is to increase the total amount of income from sales. In most cases, this results in more efficient use of human resources. The business may need to increase its promotion, but that is not
a goal of the pricing objectives. The business would need to control its marketing costs, not
increase them, to be successful.

A business that sets its prices lower than those of competitors will not make a profit unless it also

• reduces its inventory.

• increases promotion.

• controls its costs.

• enlarges its staff.

Answer explanation

To price below the competition and still make a profit, the business must keep tight control over its costs, or it will not have enough profit to maintain the business. Reducing the amount of inventory would mean the business had fewer items to sell, which would reduce its profits. Increasing promotion or enlarging the staff would increase
expenses, thus likely reduce profits.

Businesses that use profit-oriented pricing want to

• earn a reasonable amount of profit.

• focus on increasing sales volume.

• reduce their return on investment.

• create a negative cash flow.

Answer explanation

Most businesses that use profit-oriented pricing want to recover their costs and make a reasonable amount of profit. Increasing sales volume is
a primary objective of sales-oriented pricing. Most businesses want to have a positive cash flow and to increase their return on investment.

The pricing objective that is intended to earn a certain percentage of profit based on the amount of money that has been put into the business is

• percentage pricing

• unfair trade practices

• return on sales

• return on investment

Answer explanation

Some companies base the amount of profit they want to earn on the amount of their capital investment and set their prices accordingly. This profit is often expressed as a percentage, but it is called return on investment (ROI), not percentage
pricing. Unfair trade practices are business activities that are not fair to consumers or to other businesses. Return on sales is a pricing objective that bases the amount of profit a business wants to earn on its sales.