Chapter 16 – Pricing & Revenue Management

Multiple Choice Questions

1) Pricing can be used to

A) change available supply.
B) reduce supply chain costs.
C) influence demand if customers are price sensitive.
D) all of the above

2) Revenue management is
A) the use of marketing tools to increase revenue.
B) the use of pricing to increase the profit generated from a limited supply of supply chain
assets.
C) a process designed to determine the best use of funds generated through sales.
D) the use of accounting tools to monitor cash flow.

3) The two forms of supply chain assets are

A) capacity and inventory.
B) capacity and revenue.
C) inventory and revenue.
D) inventory and warehouse space.

4) Revenue management may be defined as

A) the use of differential costing based on product or capacity availability to decrease supply
chain cost.
B) the use of differential costing based on customer segment, time of use, and product or
capacity availability to increase profitability.
C) the use of differential pricing based on customer segment, time of use, and product or
capacity availability to decrease supply chain surplus.
D) the use of differential pricing based on customer segment, time of use, and product or
capacity availability to increase supply chain surplus.

5) The use of differential pricing should

A) decrease total profits for a firm.
B) increase total profits for a firm.
C) increase capacity for a firm.
D) decrease capacity utilization for a firm.

6) To differentiate between the various market segments, the firm must

A) create barriers by identifying product or service attributes that the segments value
differently.
B) eliminate barriers that identify product or service attributes that the segments value
differently.
C) negotiate separately with different market segments that value product or service attributes
differently.
D) develop pricing structures based on the volume of various product or service attributes.

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7) In most instances of differential pricing, demand from the segment paying the lower price
A) arises earlier in time than demand from the segment paying the higher price.
B) arises later in time than demand from the segment paying the higher price.
C) arises about the same time as demand from the segment paying the higher price.
D) arises both earlier and later in time than demand from the segment paying the higher price.

8) The basic trade-off to be considered by the supplier with production capacity is between
A) committing to an order from a high-price buyer or waiting for a lower price buyer to
arrive later on.
B) committing to an order from a lower price buyer or waiting for a high-price buyer to arrive
later on.
C) allowing the market to be controlled by price or capacity.
D) having marketing or operations establish the constraints within which orders are accepted.

9) When the capacity reserved for higher price buyers is wasted because demand from the
higher price segment does not materialize, this is
A) spill.
B) spoilage.
C) wastage.
D) excess.

10) If higher price buyers have to be turned away because the capacity has already been
committed to lower price buyers, this is
A) spill.
B) spoilage.
C) wastage.
D) excess.

11) An order from a lower price buyer

A) should always be accepted rather than waiting for potential revenue from a higher price
buyer.
B) should only be accepted if the expected revenue from a higher price buyer is higher than
the current revenue from the lower price buyer.
C) should be accepted if the expected revenue from a higher price buyer is lower than the
current revenue from the lower price buyer.
D) should not be accepted if the expected revenue from a higher price buyer is lower than the
current revenue from the lower price buyer.

12) The amount of the asset reserved for the higher price segment is such that
A) all orders from the lower priced segment will be accepted and filled.
B) the expected marginal revenue from the higher priced segment is more than the price to
the lower price segment.
C) the expected marginal revenue from the higher priced segment is less than the price to the
lower price segment.
D) the expected marginal revenue from the higher priced segment equals the price to the
lower price segment.

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Scenario 1 - The Stone Lion

The Stone Lion, a bed and breakfast located in a sleepy town, caters to two groups of
customers, young couples interested in something marginally more exotic than a staycation,
and corporate clients interested in doing some team-building at a location with no cellular
service. Corporations know they can get rooms with minimal notice, but young couples on
tight budgets tend to plan well in advance of their planned stay at the property. The corporate
rate for rooms is $250 per person and the demand pattern is normal with a mean of 20 and a
standard deviation of 10. The proprietor of the Stone Lion takes pity on the young couples
and charges them only $150 for identical accommodations.

13) How many rooms should be reserved for corporate clients?

A) 17
B) 14
C) 13
D) 10

14) If the price young couples are willing to pay increases by 50%, how many rooms should
be reserved for corporate clients?
A) 17
B) 7
C) 4
D) 10

15) If the corporate demand and standard deviation both decrease by 50%, how many rooms
should be reserved for corporate clients?
A) 7
B) 8
C) 9
D) 10

16) What is the difference in the number of rooms that should be held by the Stone Lion if
the standard deviation of corporate demand increases by five and if it decreases by five?
A) 1
B) 2
C) 3
D) 4

17) If the corporate price and young couples' price both double, how many additional rooms
should the Stone Lion hold for corporate clients?
A) 3
B) 2
C) 1
D) 0

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18) The tactic of varying price over time is suitable for assets
A) that do not have a clear date beyond which they lose a lot of their value.
B) that have a clear date beyond which they lose a lot of their value.
C) where customers are able to cancel orders and the value of the asset drops significantly
after a deadline.
D) where customers are unable to cancel orders and the value of the asset drops significantly
after a deadline.

19) Effective differential pricing over time will generally

A) decrease the level of product availability for the consumer willing to pay full price and
also decrease total profits for the retailer.
B) decrease the level of product availability for the consumer willing to pay full price but will
increase total profits for the retailer.
C) increase the level of product availability for the consumer willing to pay full price and also
increase total profits for the retailer.
D) increase the level of product availability for the consumer willing to pay full price but will
decrease total profits for the retailer.

20) The tactic of overbooking or overselling the available asset is suitable where
A) there is a clear date beyond which the asset loses a lot of its value.
B) there is no clear date beyond which the asset loses a lot of its value.
C) customers are able to cancel orders and the value of the asset drops significantly after a
deadline.
D) customers are unable to cancel orders and the value of the asset drops significantly after a
deadline.

21) The basic trade-off to consider during overbooking is between

A) having wasted capacity (or inventory) or a shortage of capacity (or inventory).
B) having lost sales or a shortage of capacity (or inventory).
C) having wasted capacity (or inventory) or excess capacity (or inventory).
D) having high sales or a shortage of capacity (or inventory).

22) Wasted capacity (or inventory) occurs when

A) there are excessive cancellations.
B) there are few cancellations.
C) an expensive backup needs to be arranged.
D) all of the above

23) A shortage of capacity (or inventory) occurs when

A) there are excessive cancellations.
B) there are few cancellations.
C) an expensive backup needs to be arranged.
D) B and C only

24) The cost of wasted capacity is

A) the reduction in margin that results from having to go to a backup source.
B) the margin that would have been generated if the capacity had been used for production.
C) the productivity increase generated when the capacity is used for production.
D) the sales potential of excess capacity kept in reserve for emergency production.

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25) The cost of a capacity shortage is
A) the reduction in margin that results from having to go to a backup source.
B) the margin that would have been generated if the capacity had been used for production.
C) the productivity increase generated when the capacity is used for production.
D) the sales potential of excess capacity kept in reserve for emergency production.

26) The goal when making the overbooking decision is to maximize supply chain profits by
A) maximizing the value of wasted capacity and the cost of capacity shortage.
B) maximizing supply chain profits.
C) minimizing the cost of wasted capacity and the cost of capacity shortage.
D) minimizing the cost of wasted capacity and minimizing capacity shortages.

27) An effective revenue management tactic when faced with seasonal peaks is to charge a
A) high price during the peak period and a higher price during off-peak periods.
B) higher price during the peak period and a lower price during off-peak periods.
C) lower price during the peak period and a higher price during off-peak periods.
D) low price during the peak period and a lower price during off-peak periods.

Scenario 2 - Card Table Vendor

The traditional fundraiser for the student chapter of APICS is pint mason jars filled with a
tangy barbecue sauce that the club sponsor whips up in his kitchen. Club officers set up a
card table in the atrium of the business building and take turns staffing it for the duration of
the barbecue season, which is four months. Eighteen sad years of experience have revealed
that demand varies depending on the month of the season. Customer demand in the first
month can be described as 400-p1, in the second month as 400-1.4p2, in the third month 400-
1.8p3, and in the fourth month 400-2.2p4.

28) What should the price be in period 1?

A) $287.50
B) $275.00
C) $262.50
D) $250.00

29) What should the price be in period 3?

A) $185.13
B) $181.27
C) $177.43
D) $173.61

30) What is the expected revenue if the student APICS chapter uses dynamic pricing?
A) $83,975.47
B) $84,349.06
C) $84,719.84
D) $85,209.84

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31) Responding to customer complaints (primarily from period 1 purchasers) the student
APICS chapter decides to use static pricing over the four month season. What is the optimal
price to charge for their barbecue sauce?
A) $122.50
B) $125.00
C) $127.50
D) $130.00

32) Responding to customer complaints (primarily from period 1 purchasers) the student
APICS chapter decides to use static pricing over the four month season. What is the total
revenue for the season's sales at the optimal price?
A) $49,490.00
B) $494,747.50
C) $50,000.00
D) $50,247.50

Scenario 16.3 - AITP's Revenge

The student chapter of the Association of Information technology Professionals (AITP)

notices the success that the APICS student chapter has with their traditional barbecue sauce
fundraiser. Blinded by their jealousy, the club officers decide to sell a competing product,
clocks made out of junk computer parts that the club sponsor whips up in his garage. Club
officers set up a card table in the atrium of the business building and take turns staffing it for
the duration of the computer clock season, which is four months. Twenty-five years of
experience have revealed that demand varies depending on the month of the season.
Customer demand in the first month can be described as 20-p1, in the second month as 20-
1.4p2, in the third month 20-1.8p3, and in the fourth month 20-2.2p4.

33) The components needed to produce a computer clock cost twenty-five cents. What should
the price of the computer clocks be in the first month of the selling season?
A) $5.68
B) $7.27
C) $10.13
D) $14.52

34) The components needed to produce a computer clock cost twenty-five cents. What should
the price of the computer clocks be in the third month of the selling season?
A) $14.52
B) $10.13
C) $7.27
D) $5.68

35) The components needed to produce a computer clock cost twenty-five cents. How many
clocks should the AITP club produce?
A) 39
B) 47
C) 55
D) 63

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36) The components needed to produce a computer clock cost twenty-five cents. What is the
expected profit if the AITP club sponsor produces the optimal number of clocks?
A) $263.72
B) $262.54
C) $260.97
D) $269.41

37) Shifting demand from peak to off-peak periods is beneficial if the discount given
A) during the off-peak period is more than offset by the decrease in cost because of a larger
peak.
B) during the off-peak period is more than offset by the decrease in cost because of a smaller
peak.
C) during the peak period is more than offset by the decrease in cost because of a smaller
peak.
D) during the peak period is more than offset by the decrease in cost because of a larger peak.

38) Hotels use differential pricing by day of week and time of year
A) in order to shift demand from peak periods to off-peak periods.
B) in order to increase demand during off-peak periods.
C) in order to shift revenue from peak periods to off-peak periods.
D) in order to shift profit from peak periods to off-peak periods.

39) Most firms must decide what fraction of an asset to

A) sell in bulk and what fraction of the asset to discard.
B) save for the spot market and what fraction of the asset to discard.
C) save for emergencies and what fraction of the asset to rework.
D) sell in bulk and what fraction of the asset to save for the spot market.

40) The fundamental trade-off between selling in bulk or on the spot market is
A) different from the situation where a firm serves two market segments.
B) similar to the case when a firm serves two market segments.
C) similar to the case where a firm must deal with seasonal demand.
D) similar to the case where a firm has a perishable asset.

41) The amount reserved for the spot market should be

A) such that the expected marginal revenue from the spot market equals the current revenue
from a bulk sale.
B) such that the expected marginal revenue from the spot market exceeds the current revenue
from a bulk sale.
C) such that the expected marginal revenue from the spot market is less than the current
revenue from a bulk sale.
D) equal to the maximum revenue available from the spot.

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Scenario 4 - Santorini Donkeys

Sturdy little donkeys are used to carry corpulent tourists up the Santorini caldera to the town
of Fira. One cruise line that routinely docks at the port is considering a plan to maintain their
own donkey herd, which will cost them $15,000 per thousand tourists. The number of tourists
needing this service is normally distributed, with a mean of Usually, this is enough donkey
capacity, but occasionally the cruise line rotates a bigger ship through this route and the
excursion director must purchase donkey capacity on the spot market, where is costs $20 per
tourist.

42) How many donkeys should the cruise line have in its herd?
A) 8,111
B) 7,977
C) 7,842
D) 7,707

43) Once a local donkey herder learns of the cruise line's plan, he raises his donkey rental
price to $25 per tourist. How many donkeys should be in the cruise line's herd?
A) 9,111
B) 8,971
C) 9,139
D) 8,707

44) Once a local donkey herder learns of the cruise line's plan, he lowers his donkey rental
price to $17.50 per tourist. How many donkeys should be in the cruise line's herd?
A) 7,264
B) 7,005
C) 6,711
D) 6,370

45) The cruise line's insurance policy limits the number of donkeys in their herd to 5,000.
What bulk price should the cruise line negotiate to make the 5,000 donkey herd size optimal?
A) $18,586 per ten thousand
B) $18,362 per ten thousand
C) $18,134 per ten thousand
D) $17,978 per ten thousand

46) The forecasting function is

A) the foundation of any revenue management system.
B) unnecessary for a revenue management system.
C) an added plus for any revenue management system.
D) likely to create problems for any revenue management system.

47) The goal of optimization in revenue management is to identify a tactic

A) using forecasts of customer behavior that will be most effective.
B) using linear regression that will maximize revenue.
C) using linear regression that will minimize cost.
D) that will not have to be altered.

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48) The decision to use overbooking will
A) lead to upset customers and a high cost of providing them space.
B) lead to unutilized assets and lost revenue.
C) lead to reduced profits.
D) depend upon optimization to be successful.

49) It is important for the firm to structure its revenue management program in a way that
A) it is presented simply as a mechanism for extracting maximum revenue.
B) revenue increases while improving service along some dimension that is important to
customers that pay the highest price.
C) profit is maximized.
D) all of the above

50) In order to achieve the greatest value

A) supply planning and revenue management should be performed separately.
B) supply planning should be completed first.
C) supply planning and revenue management should be combined.
D) revenue management should be completed first.