Drill 12
Review your answers above to learn from any mistakes.
AP Business with Personal Finance: Pricing Strategy Drill (Drill 12) is a practice drill. It contains 5 original questions developed by Brian Stewart, a Barron's test prep author with over 20 years of tutoring experience.
A pricing strategy drill set covering skimming, penetration, and markup for AP Business with Personal Finance; uses an invented company and original figures.
Hollowmere Candle Co. is about to launch a new hand-poured candle and is choosing a launch price. Each candle costs the company $6.00 to make. The marketing team has estimated how many candles it would sell in the first year at three different launch prices.
Hollowmere Candle Co.: Launch Price Options (first-year estimates)
| Option | Launch price per candle | Estimated first-year units |
|---|---|---|
| Option 1 | $24.00 | 3,000 |
| Option 2 | $18.00 | 5,000 |
| Option 3 | $12.00 | 9,000 |
Rounding: report all dollar amounts to the nearest whole dollar.
Question 1. How many candles does the company estimate it would sell in the first year at a launch price of $18.00?
Explanation: Q1: 5,000. The table pairs the $18.00 launch price with an estimated 5,000 first-year units. The 3,000 figure goes with the $24.00 price, not $18.00. The 9,000 figure goes with the $12.00 price. The 17,000 figure is the sum of all three rows, which is not what any single price would sell.
Question 2. Option 3 sets a low launch price of $12.00 to attract as many buyers as possible and build market share quickly. Which pricing strategy does Option 3 best illustrate?
Explanation: Q2: Penetration pricing. Setting a deliberately low launch price to attract many buyers and capture market share quickly is the definition of penetration pricing. Price skimming is the opposite move: a high launch price aimed at customers willing to pay the most early on, which fits Option 1. Cost-plus pricing describes adding a fixed markup to cost and does not by itself explain the share-grabbing goal. Premium luxury pricing keeps the price high to signal exclusivity, which also describes a high price, not the low price in Option 3.
Question 3. What is the estimated first-year revenue under Option 1 (launch price times estimated units)?
Explanation: Q3: $72,000. Option 1 sets a price of $24.00 and an estimate of 3,000 units, so 3,000 times $24.00 equals $72,000. The $90,000 figure is Option 2's revenue (5,000 times $18.00). The $108,000 figure is Option 3's revenue (9,000 times $12.00). The $54,000 figure does not match any option's price times its units.
Question 4. Suppose Hollowmere's goal at launch is to earn the highest margin per candle from the customers most eager to buy early. Which reasoning best explains why a skimming price (Option 1) fits that goal?
Explanation: Q4: A high launch price earns more margin per unit from early, eager buyers, even though fewer units are sold. Option 1 has the highest contribution margin per candle: $24 minus the $6 cost, or $18, which beats Option 2's $12 and Option 3's $6. That is the logic of price skimming, charging a higher launch price to the customers most willing to pay early. It does not by itself guarantee the highest total revenue or total contribution. A low launch price lowers the margin on each candle rather than raising it, so the first choice is backward. A high price does not produce the largest unit count; the table shows the highest price sells the fewest units. Pricing at cost leaves a margin of zero per candle, so it cannot give the highest margin.
Question 5. Hollowmere's owner decides the single most important goal is to maximize first-year revenue. Based on the table, which launch price should the owner choose?
Explanation: Q5: $12.00, because it produces the highest first-year revenue. Revenue is price times units: Option 1 is $72,000, Option 2 is $90,000, and Option 3 is $108,000, so the $12.00 price maximizes revenue and best meets the stated goal. The $24.00 option signals quality but earns the least revenue of the three, so it loses on the chosen criterion. Picking $18.00 because it is the middle option is not a revenue argument and earns less than Option 3. Revenue is clearly not the same at all three prices, so that choice is false.