Use This Information for Questions That Refer to the Sporting

question 152

Multiple Choice

Use this information for questions that refer to the Sporting Products,Inc.(SPI) case. Randy Todd,marketing manager for Sporting Products,Inc.(SPI) ,is thinking about how changes taking place among retailers in his channel might impact his strategy.
SPI sells the products it produces through wholesalers and retailers.For example,SPI sells basketballs to Wholesale Supply for $8.00.Wholesale Supply uses a 20 percent markup,and most of its "sport shop" retailer customers,like Robinson's Sporting Goods,use a 33 percent markup to arrive at the price they charge final consumers.However,one fast-growing retail chain,Sports Depot,uses only a 20 percent markup for basketballs,even though it pays Wholesale Supply the same price as other retailers.Furthermore,Sports Depot occasionally lowers the price of basketballs and sells them at cost,to draw customers into its stores and stimulate sales of its pricey basketball shoes.
Sports Depot is also using other pricing approaches that are different from the sports shops that usually handle SPI products.For example,Sports Depot prices all its baseball gloves at $20,$40,or $60-with no prices in between.There are three big bins,one for each price point.
Randy is also curious about how Sports Depot's new strategy to increase sales of tennis balls will work out.The basic idea is to sell tennis balls in large quantities to nonprofit groups,who resell the balls to raise money.For example,a service organization at a local college bought 2,000 tennis balls printed with the college logo.Sports Depot charged $.50 each for the tennis balls,plus a $500 one-time charge for the stamp to print the logo.The service group plans to resell the tennis balls for $2.50 each and contribute the profits to a shelter for the homeless.
Randy is not certain if Sports Depot's ideas will affect SPI's plans.For example,SPI is considering adding tennis racquets to the lines it produces.This would require a $500,000 addition to its factory,as well as the purchase of new equipment that costs $1,000,000.The variable cost to produce a tennis racquet would be $20,but Todd thinks that SPI could sell the racquet at a wholesale price of $40 each.That would allow most retailers to add their normal markup and make a profit.However,Sports Depot may sells the racquet at a lower than normal price.
Randy Todd wants to use marginal analysis to price the new tennis racquets,but he doesn't know the exact shape of the firm's demand curve.Under these circumstances marginal analysis

• A)is useless.
• B)may be useful anyway,because a profitable region usually surrounds the best price.
• C)will suggest the same price as break-even analysis.
• D)suggests that the only sensible approach is to follow the market leader.
• E)None of these answers is correct.

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Definitions:

Capital Investment

Funds invested in a business by the owners or shareholders to purchase assets or to provide working capital with the aim of generating long-term revenue and profits.

Net Loss

The result when a company's total expenses exceed its total revenues during a specific period, indicating a negative financial performance.

Capital Balance

The amount of money invested in a business by its owners plus any retained earnings or minus any losses.

Partnership Net Income

The total earnings derived from a partnership's business operations after subtracting all expenses, shared among the partners according to their agreement.