Question 1

What are the benefits of credit to both buyers and sellers?

Accepted Answer

Benefits of credit to buyers include the following:
•	Access to working capital, often allowing for continuity of operations.
•	The ability to satisfy immediate needs and pay for them later.
•	Better records of purchases on credit billing statements.
•	Better service and greater convenience when exchanging purchased items.
•	The ability to establish a credit history.
Benefits of credit to sellers are as follows:
•	Facilitation of increased sales volume.
•	The ability to earn money on unpaid balances.
•	A closer association with customers because of implied trust.
•	Easier selling through telephone- and mail-order systems and over the Internet.
•	Smoother sales peaks and valleys, since purchasing power is always available.
•	Easy access to a tool with which to stay competitive.

Question 2

Layla is a well-known successful movie star who recently retired and just started designing handbags. She has opened a boutique business in her hometown, which has no national department stores. She hopes to attract other celebrities, tourists, and local residents to shop at her store. She is considering pricing strategies for her products. Which strategy would best fit her image and product?

Accepted Answer

Layla should use a price skimming strategy to go along with her perceived image. This strategy will have her set prices at high levels for a limited time period, then reduce them to more competitive levels. This strategy uses the assumption that because of her social status, customers will pay a higher price because they will view her handbags as prestigious. She has little competition, which will help to recover startup costs more quickly if enough customers like her handbags.

Question 3

Match the term with its definition.
-A technique that sets a range of several distinct merchandise price levels

Accepted Answer

A) average pricing 
B) follow-the-leader pricing strategy 
C) freemium strategy 
D) markup pricing 
E) penetration pricing strategy
F)prestige pricing
G)price lining strategy
H)price skimming strategy
I)product line pricing
J)variable pricing strategy 
A) average pricing 
B) follow-the-leader pricing strategy 
C) freemium strategy 
D) markup pricing 
E) penetration pricing strategy
F)prestige pricing
G)price lining strategy
H)price skimming strategy
I)product line pricing
J)variable pricing strategy G

Question 4

Explain the relationship between the break-even point and the contribution margin. How does demand affect this relationship?

Accepted Answer

The break-even point is a function of a

Question 5

Bank credit cards are widely accepted by retailers that want to offer credit but don't provide their own credit cards.

Accepted Answer

A) True 
 B)False

Question 6

The difference between the unit selling price and the unit variable costs and expenses is known as the

Accepted Answer

A)  average price. 
B)  elasticity. 
C)  contribution margin. 
D)  break-even point. 
A)  average price. 
B)  elasticity. 
C)  contribution margin. 
D)  break-even point.

Question 7

A revolving charge account would be typical for larger purchases; smaller purchases are typical on installment accounts.

Accepted Answer

A) True 
 B)False

Question 8

Sellers benefit from offering credit to borrowers because it helps to establish a credit history.

Accepted Answer

A) True 
 B)False

Question 9

On rare occasions, pricing at less than total cost can be used as a special short-term strategy.

Accepted Answer

A) True 
 B)False

Question 10

Match the term with its definition.
-Financing provided by suppliers to client companies

Accepted Answer

A) consumer credit 
B) credit 
C) credit bureaus 
D) credit card 
E) installment account
F)open charge account
G)revolving charge account
H)trade credit
I)trade-credit agencies
J)value 
A) consumer credit 
B) credit 
C) credit bureaus 
D) credit card 
E) installment account
F)open charge account
G)revolving charge account
H)trade credit
I)trade-credit agencies
J)value

Question 11

Home-based businesses will find it easy to obtain merchant status with individual credit card companies.

Accepted Answer

A) True 
 B)False

Question 12

Match the term with its definition.
-A technique that sets very high prices for a limited period before reducing them to more competitive levels

Accepted Answer

A) average pricing 
B) follow-the-leader pricing strategy 
C) freemium strategy 
D) markup pricing 
E) penetration pricing strategy
F)prestige pricing
G)price lining strategy
H)price skimming strategy
I)product line pricing
J)variable pricing strategy 
A) average pricing 
B) follow-the-leader pricing strategy 
C) freemium strategy 
D) markup pricing 
E) penetration pricing strategy
F)prestige pricing
G)price lining strategy
H)price skimming strategy
I)product line pricing
J)variable pricing strategy

Question 13

Handyman Hardware, a small community-based store, offers its consumers the option of using credit. Creditworthy individuals are able to use the "HH Credit Card" for all purchases up to a credit limit of $1,000. Consumers are required to pay at least 20 percent of their outstanding balance at the end of each month. A 2 percent finance charge is assessed on the unpaid balance at the end of each billing cycle. Handyman Hardware is employing _____ in its business.

Accepted Answer

A)  open charge accounts 
B)  installment accounts 
C)  revolving charge accounts 
D)  selective accounts 
A)  open charge accounts 
B)  installment accounts 
C)  revolving charge accounts 
D)  selective accounts

Question 14

Match the term with its definition.
-Bad debts divided by credit sales

Accepted Answer

A) aging schedule 
B) bad-debt ratio 
C) break-even analysis 
D) break-even point 
E) contribution margin
F)elastic demand
G)elasticity of demand
H)inelastic demand
I)price 
A) aging schedule 
B) bad-debt ratio 
C) break-even analysis 
D) break-even point 
E) contribution margin
F)elastic demand
G)elasticity of demand
H)inelastic demand
I)price

Question 15

Break-even analysis begins by determining what sales volume level is needed to generate a profit.

Accepted Answer

A) True 
 B)False

Question 16

Collateral is generally required for open charge accounts.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following cards is an example of a retailer credit card?

Accepted Answer

A)  MasterCard 
B)  Visa 
C)  Discover 
D)  JCPenney card 
A)  MasterCard 
B)  Visa 
C)  Discover 
D)  JCPenney card

Question 18

Stone Creek Farm sells a special type of hay to horse owners. If the farm allows its customers to have hay delivered and then be billed at a later date, it would be using which of the following types of account?

Accepted Answer

A)  An open charge account 
B)  An installment account 
C)  A revolving charge account 
D)  A selective account 
A)  An open charge account 
B)  An installment account 
C)  A revolving charge account 
D)  A selective account

Question 19

Credit cards are usually based on a(n) _____ account system.

Accepted Answer

A)  installment 
B)  open charge 
C)  revolving charge 
D)  selective 
A)  installment 
B)  open charge 
C)  revolving charge 
D)  selective

Question 20

A penetration price strategy is most practical when there is a low threat of short-term competition in the market or when startup costs must be recovered rapidly.

Accepted Answer

A) True 
 B)False

Exam 16: Pricing and Credit Decisions

What are the benefits of credit to both buyers and sellers?

Match the term with its definition. -A technique that sets a range of several distinct merchandise price levels

Explain the relationship between the break-even point and the contribution margin. How does demand affect this relationship?

Bank credit cards are widely accepted by retailers that want to offer credit but don't provide their own credit cards.

The difference between the unit selling price and the unit variable costs and expenses is known as the

A revolving charge account would be typical for larger purchases; smaller purchases are typical on installment accounts.

Sellers benefit from offering credit to borrowers because it helps to establish a credit history.

On rare occasions, pricing at less than total cost can be used as a special short-term strategy.

Match the term with its definition. -Financing provided by suppliers to client companies

Home-based businesses will find it easy to obtain merchant status with individual credit card companies.

Match the term with its definition. -A technique that sets very high prices for a limited period before reducing them to more competitive levels

Match the term with its definition. -Bad debts divided by credit sales

Break-even analysis begins by determining what sales volume level is needed to generate a profit.

Collateral is generally required for open charge accounts.

Which of the following cards is an example of a retailer credit card?

Stone Creek Farm sells a special type of hay to horse owners. If the farm allows its customers to have hay delivered and then be billed at a later date, it would be using which of the following types of account?

Credit cards are usually based on a(n) _____ account system.

A penetration price strategy is most practical when there is a low threat of short-term competition in the market or when startup costs must be recovered rapidly.

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Understanding a Firms Financial Statements

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Planning for the Harvest

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