Use This Information for Question That Refer to the Sporting

question 188

Multiple Choice

Use this information for question 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,only uses 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 of its baseball gloves at $20,$40,or $60-with no prices in between.There are three big bins - one for each price point.
Todd 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.
Todd is not certain if Sports Depot 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,if Sports Depot sells the racquet at a lower than normal price other retailers might decide to carry it.
What is the service organization's average cost for the printed tennis balls it buys from Sports Depot?

• A) $.50
• B) $.75
• C) $.95
• D) $1.50
• E) $2.00

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Definitions:

Industry Supply

Industry Supply is the total quantity of a good or service that all producers in an industry are willing and able to sell at various prices within a specified time period.

Representative Firm

An idealized company in economic models which is designed to reflect the typical characteristics of a firm within a particular industry.

Cost Curves

Cost curves are graphical representations of the costs associated with producing varying quantities of goods, showing how costs change with changes in output.

Pure Competition

A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price determination by market demand and supply.