SMALL BUSINESS MANAGEMENT LAUNCHING AND GROWING ENTREPRENEURIAL VENTURES 16TH EDITION BY LONGENECKER – TEST BANK

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Chapter 5—The Family Business

 

TRUE/FALSE

 

  1. When a parent retires completely and turns the firm over to a son or daughter, the firm ceases to be a family business.

 

ANS:  F

A firm remains a family business when it passes from one generation to the next.

 

PTS:   1                    REF:   p. 138            OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A company run by the great grandchildren of the founder would be considered to be managed by a cousin consortium.

 

ANS:  T                    PTS:   1                    REF:   p. 136             OBJ:   5-1 TYPE: D

NAT:  Analytic | Dynamics

 

  1. In a family business, the family’s primary function it to ensure the profitability and survival of the business.

 

ANS:  F

The family’s primary goals are the development of members as well as equality of reward opportunities for each member.

 

PTS:   1                    REF:   p. 137            OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. One advantage of a family business is that there is no need to separate the business interests from the family interests.

 

ANS:  F

Competing interests can complicate the management process; therefore the separation of business interests from family interests would be best as each organization has separate purposes..

 

PTS:   1                    REF:   p. 138            OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. An advantage of a family business is that family members may have company knowledge that leads to better decisions.

 

ANS:  T                    PTS:   1                    REF:   p. 139             OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Nepotism is not as large of a problem for small companies as for large ones.

 

ANS:  F

Nepotism can be a problem for both.

 

PTS:   1                    REF:   p. 140            OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. One weakness of a family business is the tendency of family members to leave quickly when the business starts to falter.

 

ANS:  F

Members of the family are drawn to the business because of family ties, and they tend to stick with the business “through thick and thin.”

 

PTS:   1                    REF:   p. 138            OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A major weakness of a family business is that it has greater difficulty than a nonfamily business in focusing on long-run decision making.

 

ANS:  F

A family can take the long-run view more easily than corporate managers who are being evaluated on year-to-year business results.

 

PTS:   1                    REF:   p. 139            OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. The distinctive values that motivate and guide an entrepreneur in the founding of a firm cannot serve as a foundation for competitive advantage in the firm.

 

ANS:  F

The values can serve as a foundation for competitive advantage in the firm. For example, emphasizing intensive customer service may attract business that would normally go to competing firms.

 

PTS:   1                    REF:   p. 138            OBJ:   5-1 TYPE: C

NAT:  Analytic | Value Creation

 

  1. A family firm’s special patterns and beliefs comprise the firm’s organizational culture.

 

ANS:  T                    PTS:   1                    REF:   p. 140             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Research shows that next-generation family members motivated by a need-based commitment instead of a desire-based commitment are the most likely to pursue long-term careers with the family business.

 

ANS:  F

 

The family members motivated by a desire-based commitment are the most likely to work hard, because of their passion for the business.

 

PTS:   1                    REF:   p. 144            OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Family members with an obligation-based commitment may see their participation in the family business as a requirement for family unity.

 

ANS:  T                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Family members with a desire-based commitment in the family firm are the least likely to work hard because of their lack of confidence in their abilities.

 

ANS:  F

 

Family members with a need-based commitment are often in doubt and may lack the capabilities and confidence to excel.  This problem is compounded if they are promoted only because of their last name.

 

PTS:   1                    REF:   p. 144            OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A 2007 survey of family business owners conducted by MassMutual Financial Group, Kennesaw State University and the Family Firm Institute concluded that the overlap between individual and organizational values may result in increased levels of employee loyalty, commitment and organizational citizenship behavior.

 

ANS:  T                    PTS:   1                    REF:   p. 144             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Husband-wife teams that own a business are popularly referred to as co-preneurs.

 

ANS:  T                    PTS:   1                    REF:   p. 145             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Two major factors involved in grooming a son or daughter to enter the family business are the child’s aptitude and the right to choose a career.

 

ANS:  T                    PTS:   1                    REF:   p. 146             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Some family businesses benefit from effective collaboration among brothers and sisters.

 

ANS:  T                    PTS:   1                    REF:   p. 147             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A family business involving two or more children may experience either sibling cooperation or sibling rivalry.

 

ANS:  T                    PTS:   1                    REF:   p. 147             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. One sibling dilemma in a family business has been labeled the predator/parasite conflict.

 

ANS:  T                    PTS:   1                    REF:   p. 148             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. In-laws not working in the family business may have a bad attitude about the company because of only hearing one side of an argument.

 

ANS:  T                    PTS:   1                    REF:   p. 148             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. The role of the entrepreneur’s spouse in family conflicts can sometimes be described as that of a mediator in business relationships between the entrepreneur and the children.

 

ANS:  T                    PTS:   1                    REF:   p. 149             OBJ:   5-3 TYPE: D

NAT:  Analytic | Dynamics

 

  1. In the family business, family considerations affect only members of the family.

 

ANS:  F

Those employees who are not family members are still affected by family considerations–e.g., being passed over for a deserved promotion that was set aside for a family member.

 

PTS:   1                    REF:   p. 150            OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Nonfamily employees in a family business may be caught in the crossfire between feuding family members.

 

ANS:  T                    PTS:   1                    REF:   p. 150             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Family retreats are best handled by an outside facilitator, who can help develop an agenda and establish ground rules for discussion.

 

ANS:  T                    PTS:   1                    REF:   p. 152             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Even if family members lack the capability to run the business, an entrepreneur should always select a successor from this pool of talent.

 

ANS:  F

When capable family members are not available, the entrepreneur may have to bring in outside leadership to avoid a decline in firm performance.

 

PTS:   1                    REF:   p. 154            OBJ:   5-5 TYPE: C

NAT:  Analytic | Dynamics

 

  1. The process of preparing a family member to take over a family business typically takes about one year.

 

ANS:  F

This process usually takes a number of years, and in some cases decades.

 

PTS:   1                    REF:   p. 155            OBJ:   5-5 TYPE: C

NAT:  Analytic | Dynamics

 

  1. The owners of Lackland Self Storage are an example of how founding parents should clarify their children the transfer of management responsibilities.

 

ANS:  T                    PTS:   1                    REF:   p. 155             OBJ:   5-5 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. A “best practices” for the family firm is to promote family members above other, more skilled employees, so that the workers will understand who is in charge.

 

ANS:  F

Family members should be promoted based on their skill levels not on their being a family member.

 

PTS:   1                    REF:   p. 150            OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. When hiring non-family employees it is only fair to identify the positions, if any, that are reserved for family members.

 

ANS:  T                    PTS:   1                    REF:   p. 151             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A responsibility of a junior generation member who desires advancement is to understand that change is needed more so than the history of the family business.

 

ANS:  F

Junior generation member should understand how the founding values of the company could be used to implement change if needed.

 

PTS:   1                    REF:   p. 155            OBJ:   5-5 TYPE: C

NAT:  Analytic | Dynamics

 

  1. When a senior generation member is planning for succession, planning should encompass family members, employees and the owners.

 

ANS:  T                    PTS:   1                    REF:   p. 155             OBJ:   5-5 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A 2008 study found that a majority of business owners had prepared both a will and a succession plan.

 

ANS:  F

 

The survey by PNC Wealth Management reported 77 percent of business owners had a will but only 33 percent have a succession plan.

 

PTS:   1                    REF:   p. 153            OBJ:   5-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

  1. Bequeathing equal shares of ownership to children in a family business will probably create havoc in the future functioning of the business.

 

ANS:  T                    PTS:   1                    REF:   p. 156             OBJ:   5-5 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A critical part of a family firm transfer from one generation to the next is to discuss decisions with potential heirs as well as family members working in the company.

 

ANS:  T                    PTS:   1                    REF:   p. 157             OBJ:   5-5 TYPE: C

NAT:  Analytic | Dynamics

 

  1. When considering the long term health of a company during the transfer of ownership, tax advantages should be the primary concern.

 

ANS:  F

Tax considerations are relevant; however they should not be the primary concern as possible adverse effects on management may hurt the long term health of the company.

 

PTS:   1                    REF:   p. 156            OBJ:   5-5 TYPE: C

NAT:  Analytic | Finance

 

  1. A family retreat can bring family members closer together as well as strengthen the family business.

 

ANS:  T                    PTS:   1                    REF:   p. 151             OBJ:   5-5 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Family owned businesses represent less than five percent of the Fortune 500 firms in the United States.

 

ANS:  F

Over 35 percent of Fortune 500 firms have been identified as family businesses.

 

PTS:   1                    REF:   p. 137            OBJ:   5-1 TYPE: C

NAT:  Analytic | Economic Environments

 

MULTIPLE CHOICE

 

  1. In the U.S., family businesses generate what percent of the gross domestic product?
a. 35
b. 49
c. 75
d. 80

 

 

ANS:  B                    PTS:   1                    REF:   p. 137             OBJ:   5-1 TYPE: C

NAT:  Analytic | Economic Environments

 

  1. Which item is not an advantage of a family-owned business?
a. shared culture
b. focus on the long-run
c. reduced cost of control
d. commitment

 

 

ANS:  C                    PTS:   1                    REF:   p. 139             OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Which family characteristic may be in conflict with a business?
a. competition is valued
b. taking advantage of opportunities
c. perpetuate traditions
d. All of the above may be in conflict.

 

 

ANS:  C                    PTS:   1                    REF:   p. 140             OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. In a family business, the interests of the family and the interests of the business are best described as
a. overlapping.
b. conflicting.
c. coinciding.
d. having no relationship with each other.

 

 

ANS:  A                    PTS:   1                    REF:   p. 137             OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. People with higher levels of _____ and _____ commitment are more likely to support efforts to promote change to improve the company’s performance and survival.
a. need-, cost
b. desire-, obligation-
c. cost-, desire-
d. strategy-, cost-

 

 

ANS:  B                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A(n) _____   commitment may motivate a person to go “beyond the call of duty” to protect or extend personal financial interests in the company.
a. Need-based
b. Obligation-based
c. Cost-based
d. Strategy-based

 

 

ANS:  C                    PTS:   1                    REF:   p. 144             OBJ:   5-2 TYPE: D

NAT:  Analytic | Dynamics

 

  1. The close relationship of business factors and family concerns in a family business has been described as
a. separation of domains.
b. a generational gap.
c. an example of blood being thicker than water.
d. overlapping.

 

 

ANS:  D                    PTS:   1                    REF:   p. 137             OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A benefit of a strong family relationships is the greater willingness of family members to
a. adopt new operating methods when needed.
b. act generously in compensating nonfamily employees.
c. sacrifice salaries and dividends when necessary.
d. emphasize short-run profits.

 

 

ANS:  C                    PTS:   1                    REF:   p. 138             OBJ:   5-1 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Steve, Harry, and Chris, who own and operate a family auto parts store, are experiencing tough times during a downturn in the local economy. To help the store survive these conditions, the brothers agree to each take a 25 percent reduction in salary for a one-year period. This decision
a. demonstrates a weakness of financial management.
b. illustrates an important advantage of a family business.
c. reveals a lack of customer orientation in a family business.
d. reflects a lessening of entrepreneurial ambition in second-generation businesses.

 

 

ANS:  B                    PTS:   1                    REF:   p. 138             OBJ:   5-1 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. A founder’s core values may become part of the family business culture because
a. the founder typically knows what is best for the company’s culture.
b. others in the firm absorb traditions and values established by the founder.
c. the values coincide with modern management theory.
d. family members follow family traditions without excessive analysis.

 

 

ANS:  B                    PTS:   1                    REF:   p. 141             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Those with a(n) _______ commitment are the most likely to work hard because of their passion for the business.
a. need-based
b. strategy-based
c. cost-based
d. desire-based

 

 

ANS:  D                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Family members who join the business because of a concern that they may not be able to reach career success on their own display a(n)  _____ commitment.
a. desire-based
b. obligation-based
c. need-based
d. cost-based

 

 

ANS:  C                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: D

NAT:  Analytic | Dynamics

 

  1. A family member who feels he/she ought to pursue a career in the family business is expressing a(n) ______  commitment.
a. desire-based
b. obligation-based
c. cost-based
d. need-based

 

 

ANS:  B                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: D

NAT:  Analytic | Dynamics

 

  1. A family member who believes that joining the business may be the best way to benefit from what the family firm has to offer is revealing a (n)  _____ commitment.
a. desire-based
b. obligation-based
c. cost-based
d. need-based

 

 

ANS:  C                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: D

NAT:  Analytic | Dynamics

 

  1. A common problem for a founder in passing the business on to a daughter or son is
a. introducing the child to outsiders such as bankers.
b. finding a suitable position for the son or daughter within the business.
c. arranging the transition from part-time to full-time employment.
d. deciding whether the child has the necessary temperament and ability.

 

 

ANS:  D                    PTS:   1                    REF:   p. 145             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. An inherent problem for couples involved in a family business is that
a. conflicts in the business tend to carry over into family life.
b. hours of work may become longer for one person.
c. uneven division of labor i.e. one person is only responsible for the menial tasks.
d. some husbands find their masculinity threatened when their wives are better managers.

 

 

ANS:  A                    PTS:   1                    REF:   p. 145             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Jane and Joe are experiencing a strain with their family relationship after running their family business for 5 years. Which issue might be the most likely underlying cause of the tension?
a. Jane is the CEO while her husband is the CPA.
b. Joe started the business but has stepped down from the CEO position.
c. Jane and Joe’s roles have not been carefully defined as the business has grown.
d. Their difference of opinions about a business matter is spilling over into their family time.

 

 

ANS:  D                    PTS:   1                    REF:   p. 145             OBJ:   5-3 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. In considering the role of younger family members, the best philosophy is to recognize that
a. a child should have a right to a job in the business if he or she desires.
b. no family member should be hired at any level.
c. children should have a right to prove themselves.
d. sibling rivalry will always be an issue with second-generation managers.

 

 

ANS:  C                    PTS:   1                    REF:   p. 146             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. From the children’s standpoint, one common reason that they may be reluctant to join the family firm is a desire to
a. make a difference in another industry.
b. prove their abilities without family assistance.
c. make a higher rate of pay.
d. help the parent avoid favoritism.

 

 

ANS:  B                    PTS:   1                    REF:   p. 146             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Sibling rivalry in a family business
a. rarely affects nonfamily members in the firm.
b. may create disagreements about business policy.
c. is unusual if roles are determined before the siblings join the business.
d. is often good because it spurs business competition within the organization.

 

 

ANS:  B                    PTS:   1                    REF:   p. 147             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. As the spouse of the President of Two Men and a Truck, Neil Bergeron serves the family business in a typical but critical role of
a. making impartial decisions on controversial business matters when his wife, Melanie, asks.
b. filling the role of a company director so as to provide balance in family matters.
c. mediating family disputes.
d. supporting Melanie through the many hours the business requires.

 

 

ANS:  D                    PTS:   1                    REF:   p. 149             OBJ:   5-3 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. In a 2007 study on family unity, ___ percent of respondents said family members share the same values.
a. 87%
b. 65%
c. 50%
d. 38%

 

 

ANS:  A                    PTS:   1                    REF:   p. 144             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Which statement is the most correct about in-laws and possible complications in a family business?
a. Rarely do in-laws impact the business since they are only indirectly involved and have limited decision making responsibilities if at all.
b. In-laws may impact the business if they are employed in the firm and are responsible for decision making.
c. There will be a complication only when in-laws are competing against another family member for a promotion.
d. In-laws will impact the business as they increase the number of persons who are either directly or indirectly involved in the family business.

 

 

ANS:  D                    PTS:   1                    REF:   p. 148             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A document that states the principles intended to guide a family firm through times of crisis and change, including the succession process is called the
a. business plan
b. articles of incorporation
c. family business constitution
d. corporate by-laws

 

 

ANS:  C                    PTS:   1                    REF:   p. 152             OBJ:   5-4 TYPE: D

NAT:  Analytic | Ethical and Legal

 

  1. If the spouse is not actively involved in the family business, how can they best support the entrepreneur?
a. Serve as the mediator between any children wanting to enter the business and the entrepreneur.
b. Be a good listener.
c. Mandate they are given a copy of the books each month.
d. All of the above roles should be done.

 

 

ANS:  B                    PTS:   1                    REF:   p. 149             OBJ:   5-3 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Concerning the need for good management in the family business, which “best practice” is best?
a. Resist preparing successors for leadership to avoid demoralizing those who are not selected.
b. Maintain rigid guidelines based on family traditions to guide the company into the future.
c. Emphasize the attraction and retention of family members.
d. Stimulate new thinking and fresh strategic insights by promoting learning.

 

 

ANS:  D                    PTS:   1                    REF:   p. 150             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. To avoid a stifling atmosphere for nonfamily employees in a family business, the owner should
a. promote only nonfamily members.
b. avoid all special consideration for family members.
c. make clear the extent of opportunity for nonfamily members.
d. minimize discussion about future management changes.

 

 

ANS:  C                    PTS:   1                    REF:   p. 151             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. To protect the interests of both the family and the business in a family business, the owner should
a. recognize a basic obligation to supply the family with employment of some type.
b. refuse to hire family members but, instead, reward them with generous dividends.
c. personally make all personnel decisions affecting family members.
d. identify the positions, if any, that are reserved for members of the family.

 

 

ANS:  D                    PTS:   1                    REF:   p. 151             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. A nonfamily employee of a family business complains that the recent promotion of a family member was unfair. The owner should
a. enter into a discussion of the roles and opportunities for both family members and outsiders.
b. clarify that family members always have the inside track, even though this fact is disappointing to the bypassed employee.
c. get the employee to think more positively by describing other attractive features of the employee’s job.
d. acknowledge that a tension always exists and that it can never be dealt with satisfactorily.

 

 

ANS:  A                    PTS:   1                    REF:   p. 151             OBJ:   5-4 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. A family retreat is designed to
a. bring family members together to openly discuss business matters.
b. focus on business matters while avoiding extensive communication.
c. control the lines of communication.
d. announce the latest policy decisions and other changes in the business.

 

 

ANS:  A                    PTS:   1                    REF:   p. 151             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Patricia, a nonfamily employee of a family business, is concerned about competing with family members for future career opportunities. To protect her personal interests, she should
a. align herself with the CEO to hopefully know when new positions will become open.
b. ask that the owner/manager clarify the extent of opportunities considering her skill set.
c. seek assurances that she will receive first consideration for promotion, ahead of family members who are not as qualified.
d. be realistic enough to leave the firm and seek employment in a nonfamily business.

 

 

ANS:  B                    PTS:   1                    REF:   p. 151             OBJ:   5-4 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. Family retreats, which open lines of communication,
a. use the founding entrepreneur as a communication facilitator.
b. avoid discussing sensitive issues for best results.
c. involve family members but not in-laws.
d. may result in formation of a family council to continue discussion.

 

 

ANS:  D                    PTS:   1                    REF:   p. 152             OBJ:   5-4 TYPE: C

NAT:  Analytic | Dynamics

 

  1. Which statement is true concerning the process of preparing a family successor for leadership in the family business?
a. A specific date can be decided for a smoother transition between the successor and the current manager.
b. The process should be short for best result so as to not stall out any company momentum.
c. The process is best when the parties age as the next generation will be better prepared.
d. The process should be as long and drawn out as possible for the successor to be ready.

 

 

ANS:  D                    PTS:   1                    REF:   p. 155             OBJ:   5-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

  1. A family business constitution is sometimes labeled a _____.
a. business plan
b. by-law guide
c. family creed
d. succession plan

 

 

ANS:  C                    PTS:   1                    REF:   p. 153             OBJ:   5-4 TYPE: D

NAT:  Analytic | Ethical and Legal

 

  1. In preparing for succession, the senior generation should have accountability meaning that before a transfer of management occurs,
a. the estate of the senior generation should be settled and audited.
b. the senior generation should hold the next generation accountable for their actions.
c. the business should have a formal audit of the financial statements.
d. the next generation should develop long term plans for leadership and be held to these plans.

 

 

ANS:  B                    PTS:   1                    REF:   p. 155             OBJ:   5-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

  1. Senior management will be more receptive to the junior generation advancing if the junior generation
a. decides what time is best for their personal lives.
b. prepares for ownership by concentrating on learning “big” picture skills as opposed to basic management skills.
c. designs life plans for themselves and the business that involves what happens if the business fails,
d. proactively shares their preparation for advancement and ask for advice for implementation.

 

 

ANS:  D                    PTS:   1                    REF:   p. 156             OBJ:   5-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

  1. What step is best for parents to decrease succession conflict among children active in the firm and those who are not?
a. Letting those not involved in the company have a larger portion of an inheritance outside of the company and allow those involved in daily operations have more ownership of the business.
b. Letting the next generation reach a consensus about management of the company.
c. Changeing the ownership of the company so common (voting) stock is only given to those active in the company and others receive preferred (nonvoting) stock.
d. Making decisions based on tax considerations, not what is best for the next generation or the business.

 

 

ANS:  C                    PTS:   1                    REF:   p. 156             OBJ:   5-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

  1. Which statement is true concerning using available family talent in the succession plan?
a. Younger family members working in the business should realize that mistakes early on in their careers should be considered in their future advancement.
b. If the available talent is not sufficient inside the company, the owner must bring in outside leadership even if it is not perceived as a favorable decision by the family at large.
c. If a younger family member would like to advance their career by working on a new direction for the company, a negative decision by their parent means they should not discuss their ideas with the board of directors.
d. It is rare a younger member will have the skill set to rescue a struggling company; therefore they should not be considered for a succession plan.

 

 

ANS:  B                    PTS:   1                    REF:   p. 154             OBJ:   5-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

  1. Jim, the founder of a family business specializing in real estate, is contemplating turning the business over to his five children. One possibility, the founder believes, is to divide ownership equally among the children. This action would
a. be next to impossible as gaining consensus from six persons is difficult.
b. be inherently unfair if any of the children work in the company.
c. potentially hinder the future functioning of the business.
d. require a possible change in corporate structure since the company deals in real estate.

 

 

ANS:  C                    PTS:   1                    REF:   p. 156             OBJ:   5-5 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. Fran and Bob (who are married) own and manage a cleaning service. A potential advantage of this arrangement is that
a. differences of opinion about the business won’t carry over into family lives since they will see each other more hours daily.
b. it affords the opportunity to share more of their lives and build something together.
c. the business isn’t likely to dissipate their energies as they can each work on separate sections.
d. they can count on working fewer hours in the business.

 

 

ANS:  B                    PTS:   1                    REF:   p. 145             OBJ:   5-3 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. As a college student, Billy works part time in his mother’s garden supply wholesaling business during the year and full time in the summer. He would like to enter into the business after he graduates.  Based on the text, should his mother agree to his plan?
a. No, as he needs to work externally to build his confidence in taking over from nonfamily members.
b. No, as he should see if he can succeed with the family safety net and possibly gain knowledge in another industry.
c. Yes, as he would simply continue the tasks he does in the summer when he works full time.
d. Yes, as his talents have already been fully developed and shouldn’t be wasted on another company.

 

 

ANS:  B                    PTS:   1                    REF:   p. 146             OBJ:   5-2 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. A parent might attempt to resolve a transfer of ownership by giving active children in the firm’s management _____ stock and giving nonactive children _____ stock.
a. preferred, common
b. growth, speculative
c. common, preferred
d. more, less

 

 

ANS:  C                    PTS:   1                    REF:   p. 156             OBJ:   5-5 TYPE: C

NAT:  Analytic | Finance

 

  1. Tom is taking over the family business because it is what his parents have wanted him to do. He is showing a(n) _____ commitment.
a. cost-based
b. obligation-based
c. desire-based
d. need-based

 

 

ANS:  B                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. John is more likely to pursue a long-term career in the family business if he is motivated by a(n) _____ commitment.
a. cost-based
b. obligation-based
c. desire-based
d. need-based

 

 

ANS:  C                    PTS:   1                    REF:   p. 142             OBJ:   5-2 TYPE: C

NAT:  Analytic | Dynamics

 

  1. John and his brother Jack started a produce farm 20 years ago and are thinking about retirement.  Over time, their children have worked at the farm and so the cousins have started talking about taking over management.  At present, this produce farm is an example of ____.
a. co-preneur managed business
b. cousin consortium
c. owner-managed business
d. sibling partnership

 

 

ANS:  C                    PTS:   1                    REF:   p. 136             OBJ:   5-1 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

  1. Jan and Jill started a business 20 years.  Jill recently stepped down; her daughter Jenny has agreed to start managing the company with Jan’s help; and the eventual goal is for Jenny to run the entire company.  This process between Jan and Jenny is called ____.
a. sibling partnership
b. family consortium
c. mentoring
d. Two of the above are true.

 

 

ANS:  C                    PTS:   1                    REF:   p. 155             OBJ:   5-5 TYPE: A

NAT:  Reflective Thinking | Dynamics

 

ESSAY

 

  1. Explain the concept of family and business overlap in a family business.

 

ANS:

Although the family and the business are separate institutions (each with its own members, goals, and values), they overlap in the family firm.

 

Families and businesses exist for fundamentally different reasons.  The family’s primary function is the care and nurturing of family members, while the business is concerned with the production and distribution of goods and services.  Family goals include the personal development of each member and the creation of equal opportunities and rewards for each member; the main business goal is to create value for the customer and firm’s owners.

 

Since relationships among family members in a business are more sensitive than relationships among unrelated employees, competing interests can complicate the management process.  Tension that is created may sometimes lead to conflict requiring management to act as managers and not as someone’s parent or child.

 

PTS:   1                    REF:   p. 137-138     OBJ:   5-1 TYPE: C

NAT:  Communication | Dynamics

 

  1. Explain the role of the entrepreneur’s spouse as it affects a family business and show how it can be made most effective if they do not have an active part of daily operations.

 

ANS:

The spouse’s role is often described as mediator. The spouse occupies a unique position, with a strong concern for each member of the family. At the same time, the spouse sees the business with some detachment because he or she is not involved in its everyday operations. The task of creating harmony and minimizing misunderstanding is a major one.

The role can be made most effective if there is effective communication between the spouse and entrepreneur.  The spouse must be informed about what is going on in the business.

 

Students should recognize, of course, that individual differences in personality affect the manner in which spouses carry out this role.

 

PTS:   1                    REF:   p. 149            OBJ:   5-3 TYPE: C

NAT:  Communication | Dynamics

 

  1. Outline the “best practices” for the management of a family firm.

 

ANS:

The text identified the following list of “best practices”:

a. Stimulate new thinking and fresh strategic insights.
b. Solicit ample input from outsiders.
c. Establish channels for constructive communication and use them often.
d. Build a culture that accepts continuous change.
e. Promote family members only according to their skill levels.
f. Attract and retain excellent nonfamily managers.
  1. Ensure fair compensation for all employees, including those outside the family.
  2. Establish a solid leadership succession plan.
  3. Exploit unique advantages of family ownership.

 

PTS:   1                    REF:   p. 150            OBJ:   5-4 TYPE: C

NAT:  Communication | Dynamics

 

  1. Discuss guidelines for a successful family business retreat.

 

ANS:

 

Since a family retreat should have all family members including in-laws, having the meeting away from the company could encourage a more informal atmosphere.  A facilitator should be hired to guide discussion if discussion is expected to be difficult.

 

Lansky’s guidelines are to:

  1. Be clear about the purpose of the retreat. What should the meeting accomplish?
  2. Set small, attainable goals. Don’t look at the retreat as having to accomplish all possible goals.
  3. Use an agenda and stick to it. Schedule the meeting for a fixed period of time, and appoint someone to take notes.
  4. Give everyone a chance to participate. This action is critical to establish trust among the participants. People need to feel that they have been heard.
  5. Know the difference between consensus and agreement. Participants don’t have to see things the same way (agreement) in order to concur on a course of action (consensus).

 

PTS:   1                    REF:   p. 139-140     OBJ:   5-4 TYPE: C

NAT:  Communication | Dynamics

 

  1. What could a founder do to make a succession plan successful?  Using the Three-Circle Model of Family Firms, identify issues the founder should discuss with each group.

 

ANS:

 

A founder should have a well developed plan that is properly communicated to all parties.  While it may be hard for the entrepreneur to think about not being at the business, a discussion should be had with

1) a spouse especially about issues related to settling an estate;

2) family members in the business (who may or may not be an owner) so they understand who will be leading the company and why.  Family members with possible succession talent should be supported;

3) family members not in the business in relation to the impact the change would make on any inheritance; and

4) nonfamily employees and nonfamily owners in the business as to who will be leading the company and the impact of a change in leadership.

 

PTS:   1                    REF:   p. 137 | p. 153                                 OBJ:   5-1 TYPE: C | 5-5 TYPE: C

NAT:  Communication | Dynamics

 

  1. Describe seven strengths of family enterprises.  Based on the text, how does Two Men and a Truck (TNT) achieve these strengths?

 

ANS:

 

The seven principles are summarized from Leach’s Family Business: The Essentials and Exhibit 5-2.

 

  1. Family business culture and values – which provide guidance toward accomplishing shared goals

TNT has been in business for over 30 years and has involved a mother and three siblings in its daily operations for most of those years.  Even a grandmother was involved in the early years of operations. Husband of daughter is supportive even though he isn’t in daily operations.

 

  1. Commitment – the passion that grows out of a family’s sense of responsibility

Sibling partnership as the brothers and sister along with the mother still run the company now. TNT ‘s Gramma Rule of “Treat everyone with dignity, respect, and patience” illustrates this principle along with its core value of giving back to the community.

 

  1. Knowledge – applied as a competitive advantage by family members who have learned through intimate involvement

Again TNT’s 30 year history with the same family members speaks of knowledge.

 

  1. Long-range thinking – looking toward the next generation, not just the next quarter

Mother’s plan to franchise brought daughter into the company but also looked to future growth.

 

  1. A stable culture – typically found in durable, low-profile, profitable niche enterprises

3o years of operations

 

  1. Speedy decisions – a function of trust among family members

When daughter decided to step down, decision was made immediately for brother to step into position.

 

  1. Reliability and pride, recognized by customers, suppliers, creditors, and other outsiders

Again 3o years of operations has resulting in TNT being a national operation.

 

PTS:   1                    REF:   p. 139            OBJ:   5-2 TYPE: A

NAT:  Communication | Dynamics

 

 

 

 

Chapter 16—Pricing and Credit Decisions

 

TRUE/FALSE

 

  1. Prestige pricing (setting a high price to convey an image of high quality or uniqueness) is a pricing tactic that reflects competitive advantage.

 

ANS:  T                    PTS:   1                    REF:   p. 478             OBJ:   16-1 TYPE: D

NAT:  Analytic | Finance

 

  1. Because small businesses are small by definition, pricing and credit considerations are relatively unimportant to their overall performance.

 

ANS:  F

Pricing and credit decisions are vital to small businesses because they affect both revenues and cash flow.

 

PTS:   1                    REF:   p. 473            OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. Sound pricing practices recognize that product costs are more important than selling costs and overhead costs.

 

ANS:  F

All of three cost classifications must be incorporated into the pricing process.

 

PTS:   1                    REF:   p. 474            OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. Average pricing is an appropriate pricing approach for small businesses because the method takes into consideration both fixed and variable costs.

 

ANS:  F

Although fixed and variable costs do not behave in the same way, small businesses often treat them identically—this average pricing approach is thus a dangerous one.

 

PTS:   1                    REF:   p. 475            OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. Under certain conditions, pricing at less than total costs makes sense as a long-term strategy.

 

ANS:  F

Pricing at less than total cost can be sustained only over the short term, and even then this will work only under certain circumstances.

 

PTS:   1                    REF:   p. 476            OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. The competitive advantage of a firm will affect consumers’ demand for its product.

 

ANS:  T                    PTS:   1                    REF:   p. 477             OBJ:   16-1 TYPE: C

NAT:  Analytic | Value Creation

 

  1. Markup rates should be high enough to cover a product’s cost, cover expenses, any price reductions, and profit.

 

ANS:  F

Markup rates are added to a product’s cost  to cover expenses, price reductions and profit.

 

PTS:   1                    REF:   p. 481            OBJ:   16-2 TYPE: D

NAT:  Analytic | Finance

 

  1. In conducting a comprehensive break-even analysis, a firm must examine both its revenue-cost relationships and sales forecasts.

 

ANS:  T                    PTS:   1                    REF:   p. 478             OBJ:   16-2 TYPE: C

NAT:  Analytic | Finance

 

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

 

ANS:  T                    PTS:   1                    REF:   p. 478             OBJ:   16-2 TYPE: C

NAT:  Analytic | Finance

 

  1. The demand for a product always decreases as its price increases in a break-even analysis.

 

ANS:  F

Demand typically decreases as price increases, but this is not always the case.

 

PTS:   1                    REF:   p. 480            OBJ:   16-2 TYPE: C

NAT:  Analytic | Finance

 

  1. Markups may be expressed as a percentage of either the firm’s cost or the industry-standard cost.

 

ANS:  F

Markups may be expressed as a percentage of either cost or the selling price of the product/service.

 

PTS:   1                    REF:   p. 481            OBJ:   16-2 TYPE: C

NAT:  Analytic | Finance

 

  1. Sellers using dynamic pricing set prices based on prices of market leaders.

 

ANS:  F

Dynamic pricing sets prices higher after gauging a customer’s financial means and desire for the product or service.

 

PTS:   1                    REF:   p. 482            OBJ:   16-3 TYPE: D

NAT:  Analytic | Finance

 

  1. Price lining refers to the systematic determination of the right price for a product or service.

 

ANS:  F

A price lining strategy determines several distinct prices at which similar items of retail merchandise are offered for sale.

 

PTS:   1                    REF:   p. 482            OBJ:   16-3 TYPE: D

NAT:  Analytic | Finance

 

  1. Variable pricing strategy occurs where a business sets and advertises a fixed price but gives a discount for reasons such as the customer’s amount purchased.

 

ANS:  T                    PTS:   1                    REF:   p. 482             OBJ:   16-3 TYPE: D

NAT:  Analytic | Finance

 

  1. Break-even analysis is an accurate tool for pricing because it points directly to the correct price for a given product.

 

ANS:  F

Break-even analysis may not be as accurate as it seems, so this should be viewed only as a tool for pricing and should not be used by itself to determine the final price.  Market characteristics and the firm’s current market strategy should be considered.

 

PTS:   1                    REF:   p. 481            OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. With a skimming price strategy, prices are set lower than what will be the normal, long-range price to gain more market share.

 

ANS:  F

The definition describes a penetration price strategy; a skimming price strategy sets very high prices for a limited period before the price is reduced.

 

PTS:   1                    REF:   p. 482            OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. 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.

 

ANS:  F

It is a skimming price strategy that is most practical when there is little threat of short-term competition in the market or when startup costs must be recovered rapidly.

 

PTS:   1                    REF:   p. 482            OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. A small business in competition with larger firms is seldom in a position to function as a price leader.

 

ANS:  T                    PTS:   1                    REF:   p. 482             OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. Pricing based on what the market will bear works only for non-standardized products in markets where there is low competition.

 

ANS:  T                    PTS:   1                    REF:   p. 482             OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. Under certain circumstances, local, state, and federal laws must be considered in setting prices in a small business.

 

ANS:  T                    PTS:   1                    REF:   p. 483             OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. If a small business has products compete with one another, pricing decisions must take into account the effects of a single product price on the rest of the line.

 

ANS:  T                    PTS:   1                    REF:   p. 483             OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. Trade credit is extended to consumers purchasing large volumes of products.

 

ANS:  F

Trade credit is extended by non-financial firms (e.g., manufacturers and wholesalers) to other businesses that are also consumers of the firm’s products/services.

 

PTS:   1                    REF:   p. 487            OBJ:   16-4 TYPE: D

NAT:  Analytic | Finance

 

  1. An installment account is a typical trade credit agreement.

 

ANS:  F

An installment account is not a trade credit; it is a vehicle for long-term consumer credit.

 

PTS:   1                    REF:   p. 486            OBJ:   16-4 TYPE: D

NAT:  Analytic | Finance

 

  1. Sellers often decide to offer credit to borrowers because it helps with the exchange of purchased items.

 

ANS:  F

Better service and greater convenience when exchanging items is a benefit to the borrower, but not to the seller.

 

PTS:   1                    REF:   p. 484            OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. One of the benefits of extending credit to borrowers is that doing so provides better records of purchases on credit billing statements.

 

ANS:  T                    PTS:   1                    REF:   p. 484             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Because it is a standard practice for many business types, selling on credit cannot often be avoided.

 

ANS:  T                    PTS:   1                    REF:   p. 485             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

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

 

ANS:  F

The reverse is true.

 

PTS:   1                    REF:   p. 486            OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Bank credit cards are widely accepted by retailers who desire to offer credit but do not have their own credit cards.

 

ANS:  T                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. In many lines of business, trade credit terms are so firmly set by tradition that a unique policy is difficult for a small firm to implement.

 

ANS:  T                    PTS:   1                    REF:   p. 488             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. American Express and Diner’s Club are examples of entertainment credit cards.

 

ANS:  T                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: A

NAT:  Analytic | Finance

 

  1. Trade-credit agencies collect credit information on business firms and consumers in a given area.

 

ANS:  F

Trade-credit agencies collect credit information on business firms, but not consumers.

 

PTS:   1                    REF:   p. 489            OBJ:   16-5 TYPE: D

NAT:  Analytic | Finance

 

  1. The Consumer Credit Protection Act requires that the finance charge for credit be stated as an annual percentage rate and that creditors specify the procedures used for correcting billing mistakes.

 

ANS:  T                    PTS:   1                    REF:   p. 492             OBJ:   16-5 TYPE: D

NAT:  Analytic | Ethical and Legal

 

  1. The bad-debt ratio is the ratio of bad debts to total sales.

 

ANS:  F

The bad-debt ratio is the ratio of bad debts to credit sales.

 

PTS:   1                    REF:   p. 492            OBJ:   16-5 TYPE: D

NAT:  Analytic | Finance

 

  1. The aging schedule is a categorization of accounts receivable based on the length of time they have been outstanding.

 

ANS:  T                    PTS:   1                    REF:   p. 490             OBJ:   16-5 TYPE: D

NAT:  Analytic | Finance

 

  1. For installment selling, the amount of credit should not exceed the repossession value of the goods sold.

 

ANS:  T                    PTS:   1                    REF:   p. 488             OBJ:   16-5 TYPE: C

NAT:  Analytic | Finance

 

  1. Every applicant is credit worthy to some degree.

 

ANS:  T                    PTS:   1                    REF:   p. 488             OBJ:   16-5 TYPE: C

NAT:  Analytic | Finance

 

  1. An important source of credit information is the customer’s previous credit history.

 

ANS:  T                    PTS:   1                    REF:   p. 489             OBJ:   16-5 TYPE: C

NAT:  Analytic | Finance

 

  1. To ensure prompt payment, a business extending credit should have adequate billing records and collection procedures.

 

ANS:  T                    PTS:   1                    REF:   p. 489             OBJ:   16-5 TYPE: C

NAT:  Analytic | Finance

 

  1. The primary purposes of the Equal Credit Opportunity Act are to inform consumers about terms of a credit agreement and to require creditors to specify how finance charges are computed.

 

ANS:  F

These are the primary purposes of the federal Consumer Credit Protection Act. The Equal Credit Opportunity Act ensures that all consumers are given an equal chance to obtain credit.

 

PTS:   1                    REF:   p. 492            OBJ:   16-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

MULTIPLE CHOICE

 

  1. The seller’s measure of what he or she is willing to receive in exchange for transferring ownership or use of a product or service is
a. credit.
b. average pricing.
c. demand.
d. price.

 

 

ANS:  D                    PTS:   1                    REF:   p. 473             OBJ:   16-1 TYPE: D

NAT:  Analytic | Finance

 

  1. A pricing tactic whereby a firm sets a high price to convey an image of high quality or uniqueness is known as
a. skimming pricing.
b. penetration pricing.
c. variable pricing.
d. prestige pricing.

 

 

ANS:  D                    PTS:   1                    REF:   p. 478             OBJ:   16-1 TYPE: D

NAT:  Analytic | Finance

 

  1. The total sales revenue of a small business is a direct reflection of
a. sales volume and credit terms.
b. price and credit terms.
c. price and expenses.
d. sales volume and price.

 

 

ANS:  D                    PTS:   1                    REF:   p. 473             OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. A business will not be successful unless it charges a price for its products that covers its total
a. cost and a margin of profit.
b. cost of goods and selling cost.
c. fixed cost and overhead cost.
d. variable cost and cost of goods.

 

 

ANS:  A                    PTS:   1                    REF:   p. 474             OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. Company costs incurred for a salesperson would be included in
a. cost of goods sold.
b. human resources.
c. overhead costs.
d. selling costs.

 

 

ANS:  D                    PTS:   1                    REF:   p. 474             OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. In general, products that are consumed in fixed amounts have
a. constant demand.
b. elastic demand.
c. inelastic demand.
d. variable demand.

 

 

ANS:  C                    PTS:   1                    REF:   p. 476             OBJ:   16-1 TYPE: C

NAT:  Analytic | Finance

 

  1. Jeremy Hitchcock, CEO of Dyn, found that
a. higher overhead costs cause the company to shift to value-based pricing.
b. the move to a B2C model changed pricing strategies.
c. prestige pricing while avoiding discounting worked best for the company.
d. establishing salesperson compensation impacted pricing.

 

 

ANS:  C                    PTS:   1                    REF:   p. 478             OBJ:   16-1 TYPE: A

NAT:  Analytic | Finance

 

  1. If Clarrisa’s Fine Jewelry instructed their sales team to stress the uniqueness of the store’s hand designed jewelry, a  ____ pricing strategy would be expected.
a. skimming
b. prestige
c. follow-the-leader
d. dynamic

 

 

ANS:  B                    PTS:   1                    REF:   p. 478             OBJ:   16-1 TYPE: A

NAT:  Analytic | Finance

 

  1. When pricing in an economic downturn, Allen Ackerman found as owner of A-List Placement that
a. increasing prices and services can work.
b. even consumers who perceive that a product/service is a solution to an unsatisfied need may demand less.
c. pricing needs to center around competitor prices.
d. The company found all statements were true.

 

 

ANS:  A                    PTS:   1                    REF:   p. 477             OBJ:   16-1 TYPE: A

NAT:  Analytic | Finance

 

  1. Active Feet, a small manufacturer of shoes, hired an additional vice-president and purchased a barrel of synthetic rubber used to make shoe soles. These two expenses should be considered a(n) ____ and a(n) ____, respectively.
a. selling cost/cost of goods sold
b. overhead cost/cost of goods sold
c. selling cost/overhead cost
d. overhead cost/selling cost

 

 

ANS:  B                    PTS:   1                    REF:   p. 474             OBJ:   16-1 TYPE: A

NAT:  Analytic | Finance

 

  1. Hollywood Amusement, a small independent movie theater, decreased the price of admission from $10 to $9. Prior to the price decrease, the business sold 1,000 tickets each month. After the price decrease, it experienced ticket sales of 1,500 a month. If the change in sales is attributable only to the change in price, Hollywood Amusement faces ____ for its movie tickets.
a. elastic demand
b. constant demand
c. inelastic demand
d. variable demand

 

 

ANS:  A                    PTS:   1                    REF:   p. 476             OBJ:   16-1 TYPE: A

NAT:  Analytic | Finance

 

  1. When a small business owner systematically compares various cost and revenue estimates in order to determine the acceptability of alternative prices, ________ is being used.
a. break-even analysis
b. price lining
c. cost functioning
d. demand functioning

 

 

ANS:  A                    PTS:   1                    REF:   p. 478             OBJ:   16-2 TYPE: D

NAT:  Analytic | Finance

 

  1. The difference between the unit selling price and the unit variable costs and expenses is known as the
a. penetration price.
b. elasticity.
c. contribution margin.
d. break-even point.

 

 

ANS:  C                    PTS:   1                    REF:   p. 479             OBJ:   16-2 TYPE: D

NAT:  Analytic | Finance

 

  1. Markup pricing may be expressed in terms of a percentage of either the ____ or the cost.
a. quantity
b. operating expenses
c. selling price
d. estimated expenses

 

 

ANS:  C                    PTS:   1                    REF:   p. 481             OBJ:   16-2 TYPE: D

NAT:  Analytic | Finance

 

  1. A comprehensive break-even analysis entails
a. examining revenue-cost relationships and establishing sales forecasts.
b. analyzing marketing strategy’s effect on revenue and costs.
c. the use of comparison pricing and contribution margins.
d. approximating debits, credits, costs and sales.

 

 

ANS:  A                    PTS:   1                    REF:   p. 478             OBJ:   16-2 TYPE: C

NAT:  Analytic | Finance

 

  1. Within the framework of a break-even analysis, an examination of ____ is conducted to determine the quantity at which the product, with an assumed price, will generate enough revenue to start earning a profit.
a. costs
b. revenues
c. sales forecasts
d. costs and revenue

 

 

ANS:  D                    PTS:   1                    REF:   p. 478             OBJ:   16-2 TYPE: C

NAT:  Analytic | Finance

 

  1. Demand for a product typically ______ as price ______.
a. decreases, increases
b. decreases, stays the same
c. stays the same, increases
d. increases, decreases

 

 

ANS:  A                    PTS:   1                    REF:   p. 480             OBJ:   16-2 TYPE: C

NAT:  Analytic | Finance

 

  1. Fine Framings, a small framing shop, uses markup pricing to arrive at a final selling price. The firm sells its frames at a price of $25, given a $15 unit cost. Fine Framings‘ markup on the selling price is ____, and its markup on cost is ____.
a. 150%, 60%
b. 60%, 150%
c. 167%, 67%
d. 250%, 100%

 

 

ANS:  B                    PTS:   1                    REF:   p. 481             OBJ:   16-2 TYPE: A

NAT:  Analytic | Finance

 

  1. Clock Tickers, a small retailer of a quality alarm clock, sells its product for $180. If Clock Tickers adheres to pricing based on a 35% markup of cost, the firm’s product costs are approximately
a. $63.
b. $98.
c. $133.
d. $155.

 

 

ANS:  C                    PTS:   1                    REF:   p. 481             OBJ:   16-2 TYPE: A

NAT:  Analytic | Finance

 

  1. The Golf Global Company sells 1,000 shirts annually at a price of $35 each. If the company’s pricing policies adhere to a 40% markup of selling price, the cost of each shirt is
a. $14.
b. $21.
c. $28.
d. $32.

 

 

ANS:  B                    PTS:   1                    REF:   p. 481             OBJ:   16-2 TYPE: A

NAT:  Analytic | Finance

 

  1. What strategy prices products at a lower than normal, long-range market price to gain more rapid market share?
a. variable pricing
b. skimming price
c. price lining
d. penetration pricing

 

 

ANS:  C                    PTS:   1                    REF:   p. 481             OBJ:   16-3 TYPE: D

NAT:  Analytic | Finance

 

  1. All of the following reasons support implementing a penetration pricing strategy except to
a. gain rapid market acceptance.
b. discourage new competitors’ entry into the market.
c. increase existing market share.
d. rapidly recover startup costs.

 

 

ANS:  D                    PTS:   1                    REF:   p. 481             OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. For a price lining strategy, a company’s inventory levels for each line will depend directly on the ____ of the customers.
a. buying desires and income level
b. personal demographics
c. credit worthiness
d. product awareness

 

 

ANS:  D                    PTS:   1                    REF:   p. 482             OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. Which statement  is not true with respect to pricing in a small business?
a. Continual price adjustments can be both costly to the seller and confusing to buyers.
b. Local, state, and federal laws must be considered when setting prices in some situations.
c. Conducted properly, price determination is an exact science.
d. Discounts are often used to adjust prices to meet a variety of market needs.

 

 

ANS:  C                    PTS:   1                    REF:   p. 483             OBJ:   16-3 TYPE: C

NAT:  Analytic | Finance

 

  1. A business that has a gaming console intended to compete directly with Sony’s Playstation gaming console would likely use a ____ pricing strategy.
a. follow-the-leader
b. penetration
c. prestige
d. variable

 

 

ANS:  A                    PTS:   1                    REF:   p. 482             OBJ:   16-3 TYPE: A

NAT:  Analytic | Finance

 

  1. Chocolate Concoctions, a maker of high end chocolate candies, decided to price its boxes of candies below the long-term market price. The decision was made to increase market share and discourage other firms from entering the chocolate market. Chocolate Concoctions was implementing a
a. penetration pricing strategy.
b. price lining strategy.
c. skimming price strategy.
d. variable pricing strategy.

 

 

ANS:  A                    PTS:   1                    REF:   p. 481             OBJ:   16-3 TYPE: A

NAT:  Analytic | Finance

 

  1. Troy Bourbon, a local bourbon distillery, initially sold its product at a premium price of $45 because the company believed consumers would view the bourbon as a prestige item. The company decided that when startup costs had been fully recovered and competition became imminent, the company would reduce the price to $30 which was more expected in the market.  The distillery is using a
a. variable pricing strategy.
b. skimming price strategy.
c. price lining strategy.
d. penetration pricing strategy.

 

 

ANS:  B                    PTS:   1                    REF:   p. 482             OBJ:   16-3 TYPE: A

NAT:  Analytic | Finance

 

  1. Retro Hits, a local band covering songs from the 1980’s and 1990’s, decided they wanted to expand to more college students.  Research showed students thought the current $15 ticket price was too high for a local band. To strengthen ticket demand, Retro Hits began offering $10 tickets to all fans who checked in on Facebook.  The band was using a
a. variable pricing strategy.
b. price lining strategy.
c. flexible pricing strategy.
d. differentiated pricing strategy.

 

 

ANS:  A                    PTS:   1                    REF:   p. 482             OBJ:   16-3 TYPE: A

NAT:  Analytic | Finance

 

  1. Lorrie Veasey, owner of Our Name is Mud, used discount coupons for special event items to drive customers to her retail stores.  Using such promotions and stating that “the regular price is never chiseled in stone” would indicate Lorrie is using a
a. variable pricing strategy.
b. price lining strategy.
c. flexible pricing strategy.
d. differentiated pricing strategy.

 

 

ANS:  A                    PTS:   1                    REF:   p. 483             OBJ:   16-3 TYPE: A

NAT:  Analytic | Finance

 

  1. Credit granted by retailers to consumers who purchase for personal or family use is referred to as
a. trade credit.
b. personal credit.
c. open credit.
d. consumer credit.

 

 

ANS:  D                    PTS:   1                    REF:   p. 486             OBJ:   16-4 TYPE: D

NAT:  Analytic | Finance

 

  1. With  a(n) ____, the customer obtains possession of goods or services when they are purchased. Payment is due when billed at a later date.
a. installment account
b. open charge account
c. revolving account
d. selective account

 

 

ANS:  B                    PTS:   1                    REF:   p. 486             OBJ:   16-4 TYPE: D

NAT:  Analytic | Finance

 

  1. Credit cards are usually based on a(n) ____ account system.
a. installment
b. open charge
c. revolving
d. a selective

 

 

ANS:  C                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: D

NAT:  Analytic | Finance

 

  1. Which “C” defines the customer’s asset conservation?
a. Capacity
b. Character
c. Collateral
d. Conditions

 

 

ANS:  A                    PTS:   1                    REF:   p. 489             OBJ:   16-4 TYPE: D

NAT:  Analytic | Finance

 

  1. The major objective of a firm in granting credit is
a. generating consumer goodwill.
b. make sales.
c. promoting the business
d. reducing bad debt risk.

 

 

ANS:  B                    PTS:   1                    REF:   p. 484             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Benefits of credit to sellers include all of the following reasons except
a. creating a closer association with the customers.
b. providing a tool for competitive advantage.
c. smoothing out sales peaks and valleys.
d. sustaining long-term sales, even if these exceed the buying power of the customer.

 

 

ANS:  D                    PTS:   1                    REF:   p. 485             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Credit sales ____ the amount of working capital needed by the business doing the selling.
a. augment
b. decrease
c. increase
d. offset

 

 

ANS:  C                    PTS:   1                    REF:   p. 486             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Which statement is true with respect to installment accounts?
a. A down payment is normally required.
b. By law, finance charges cannot exceed 20 percent of the purchase price.
c. Large purchases are usually not covered by this form of credit.
d. Short-term consumer credit is provided.

 

 

ANS:  A                    PTS:   1                    REF:   p. 486             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Which statement is true with respect to revolving charge accounts?
a. A down payment is normally required.
b. A fixed amounts must be paid monthly, regardless of the outstanding balance.
c. Charged purchases may not exceed the credit limit.
d. Finance charges increase as the outstanding balance increases.

 

 

ANS:  C                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Hillary wants to purchase a refrigerator on credit. If she uses an installment plan, what is most likely to occur?
a. A down payment will be required.
b. A discounted price on her purchase will not be offered.
c. By law, finance charges on her account cannot exceed 20 percent of the purchase price.
d. Taxes will not be charged.

 

 

ANS:  A                    PTS:   1                    REF:   p. 486             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. The basic types of credit cards include all of the following types except
a. bank credit cards.
b. collective establishment credit cards.
c. entertainment credit cards.
d. retailer credit cards.

 

 

ANS:  B                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Which option is designed for long-term credit?
a. Credit cards
b. Installment accounts
c. Open charge accounts
d. Revolving charge accounts

 

 

ANS:  B                    PTS:   1                    REF:   p. 486             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Which question is not one of the Four Credit Questions (FCQ) used in evaluating the credit status of an applicant?
a. Can the buyer pay as promised?
b. Will the buyer pay?
c. Does the buyer have sufficient viable credibility?
d. Can the buyer be force to pay?

 

 

ANS:  C                    PTS:   1                    REF:   p. 488             OBJ:   16-4 TYPE: C

NAT:  Analytic | Finance

 

  1. Quality Cars, an independent used-car dealership, utilizes long-term consumer credit in its business. Typically, consumers are allowed to place a 15 percent down payment on an automobile. Then, over a period of 48 months, the consumer is allowed to make payments on the balance of the account, which includes compound interest of 2 percent monthly on the unpaid portion. Quality Cars is employing ____ in its business.
a. open charge accounts
b. installment accounts
c. revolving accounts
d. selective accounts

 

 

ANS:  B                    PTS:   1                    REF:   p. 486             OBJ:   16-4 TYPE: A

NAT:  Analytic | Finance

 

  1. 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.
a. open charge accounts
b. installment accounts
c. revolving charge accounts
d. selective accounts

 

 

ANS:  C                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: A

NAT:  Analytic | Finance

 

  1. A trade credit bill of $80,000 with terms of sale of 2/5, net 30 means the buyer saves ____ if the bill is paid within the discount period.
a. $0
b. $1,600
c. $2,500
d. $4,000

 

 

ANS:  B                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: A

NAT:  Analytic | Finance

 

  1. How much discount will a buyer receive if the buyer pays a trade credit bill of $60,000 with terms of sale of 2/5, net 30 on the net due date?
a. $0
b. $500
c. $1200
d. $3,000

 

 

ANS:  A                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: A

NAT:  Analytic | Finance

 

  1. Which card is a retailer credit card?
a. Mastercard
b. VISA
c. Diner’s Club
d. Sears Card

 

 

ANS:  D                    PTS:   1                    REF:   p. 487             OBJ:   16-4 TYPE: A

NAT:  Analytic | Finance

 

  1. 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 type of account?.
a. an open charge account
b. an installment account
c. a revolving account
d. a selective account

 

 

ANS:  A                    PTS:   1                    REF:   p. 409             OBJ:   16-4 TYPE: A

NAT:  Analytic | Finance

 

  1. A primary purpose of the federal Consumer Credit Protection Act is to
a. require creditors to specify how finance charges are computed.
b. grant certain rights to credit applicants regarding credit reports.
c. inform consumers about all forms of credit available to them.
d. specify what information a customer’s employer can release about him/her.

 

 

ANS:  A                    PTS:   1                    REF:   p. 492             OBJ:   16-5 TYPE: D

NAT:  Analytic | Ethical and Legal

 

  1. Which organization is a good source of consumer credit information?
a. Trade-credit agencies
b. Third-party reports
c. The Federal Credit Reporting Agency
d. Credit bureaus

 

 

ANS:  D                    PTS:   1                    REF:   p. 489             OBJ:   16-5 TYPE: D

NAT:  Analytic | Finance

 

  1. Slow-paying credit accounts
a. almost always help to build goodwill with customers.
b. are rarely a problem for small businesses.
c. tie up the seller’s working capital.
d. yield advantages from carry-over effects.

 

 

ANS:  C                    PTS:   1                    REF:   p. 491             OBJ:   16-5 TYPE: C

NAT:  Analytic | Finance

 

  1. All of the following methods are acceptable options for entrepreneurs attempting to collect delinquent accounts receivable except
a. personal contacts.
b. referrals to collection agencies or attorneys.
c. telephone calls to a customer’s employer.
d. written reminders.

 

 

ANS:  C                    PTS:   1                    REF:   p. 491             OBJ:   16-5 TYPE: C

NAT:  Analytic | Ethical and Legal

 

  1. Information Express is a privately owned and operated organization that collects credit information on business firms. After the organization analyzes and evaluates the data, it makes credit ratings available to client companies for a fee. Information Express is a
a. trade-credit agency.
b. financial credit agency.
c. credit collection agency.
d. credit bureau.

 

 

ANS:  A                    PTS:   1                    REF:   p. 489             OBJ:   16-5 TYPE: A

NAT:  Analytic | Finance

 

  1. CarePair, a small business specializing in making and distributing hospital gowns to medical facilities, recent aging schedule showed an increase in medical facilities who are past due in payment.  The facilities who are ____ days should be contacted first for payment.
a. 120
b. 90
c. 60
d. It depends on the individual account.

 

 

ANS:  D                    PTS:   1                    REF:   p. 490             OBJ:   16-5 TYPE: A

NAT:  Analytic | Finance

 

ESSAY

 

  1. Use product examples to illustrate elastic and inelastic demand.

 

ANS:

Elasticity of demand is the degree to which a change in price affects the quantity demanded.  Elastic demand happens when an increase in price lowers demand or a decrease in price raises demand.  Luxury cars, jewelry, or products with the latest technology are examples. Inelastic demand is if an increase in price raises revenue or a decrease in price lowers revenue.  Necessities such as toilet paper, sugar or toothpaste typically have inelastic demand.

 

PTS:   1                    REF:   p. 476            OBJ:   16-1 TYPE: C

NAT:  Communication | Finance

 

  1. How are the three components of total cost related to variable and fixed costs?  Use a clothing retailer to illustrate the costs.

 

ANS:

Total cost is a combination of

– Cost of goods offered for sale: A clothing retailer, for example, must include in the selling price the cost of the clothing and related freight charges.

– Selling cost: The direct cost related to selling the product such as a salesperson’s salary plus commissions or a sales promotion to sell the clothing are selling costs..

– Overhead cost applicable to the given product: The costs related to storage, office supplies, utilities, taxes, and other employee salaries and wages would be in the category.

 

Fixed costs remain constant no matter how many articles of clothing are sold. Examples would include cost of maintaining the storage, taxes and employee salaries that are paid hourly.  Variable costs increase as more clothing is sold or decrease as less clothing is sold.   Examples of variable costs are the cost of goods for the clothing and the sales commissions.

 

PTS:   1                    REF:   p. 474            OBJ:   16-1 TYPE: C

NAT:  Communication | Finance

 

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

 

ANS:

The break-even point is a function of a firm’s fixed operating costs and expenses, and the unit selling price less the unit variable costs and expenses. The higher the fixed costs, the more units must be sold to reach the break-even point. The greater the difference between the unit selling price and the unit variable costs and expenses, the fewer units must be sold to the break-even point.  The formula is

 

Break-even point =                        Total Fixed Costs and Expenses                   

Unit Selling Price – Unit Variable Costs and Expenses

 

The difference between the unit selling price and the unit variable costs and expenses (the denominator of the formula) is the contribution margin; that is, for each unit sold, a contribution is made toward covering the company’s fixed costs.

 

The indirect impact of price on the quantity that can be sold complicates pricing decisions. Demand for a product typically decreases as price increases but price may influence demand resulting in an increased demand for a product when it is priced higher. Therefore, marketing research should be used to estimate demand for a product at various prices followed by the information being considered for the break-even analysis.

 

PTS:   1                    REF:   p. 479            OBJ:   16-2 TYPE: C

NAT:  Communication | Finance

 

  1. What would be the break-even point in units for a firm selling fishing poles at a selling price of $100, variable cost per pole is $65, and fixed costs are $100,000?

 

ANS:

BE =  $100,000   = 2,858 poles (round up to since can’t sell a partial fishing pole)

($100-$65)

 

PTS:   1                    REF:   p. 479            OBJ:   16-2 TYPE: A

NAT:  Communication | Finance

 

  1. How many meals would need to be sold for a 50 seat restaurant’s break-even point  with the following information?  Is the break-even point realistic in the number of meals that could be sold per day if the restaurant is open 6 days a week?
Average Check $10.00
Equipment $40,000
Depreciation 20%, 5 year straight line
Loan $100,000
Interest 5%
Fixed Costs $60,000
Variable Costs $1.00

 

 

ANS:

Depreciation Cost = ($40,000 * .20) / 5 = $1,600

Interest Expense = $100,000 * .05 = $5,000

Days Open = 52 weeks * 6 days = 312

 

Therefore BEP in meals = $60,000 + $1,600 + $5,000 = 7,400 meals

$10.00 – $1.00

 

7,400 meals / 312 = 24 meals per day which is certainly possible for a 50 seat restaurant.

 

PTS:   1                    REF:   p. 488            OBJ:   16-2 TYPE: A

NAT:  Communication | Finance

 

  1. Contrast penetration price and skimming price strategies.

 

ANS:

Penetration pricing involves pricing products or services lower than the normal, long-range market price. The purpose is to gain more rapid market acceptance or to increase existing market share.

 

Skimming pricing sets prices at very high levels for a limited period for the purpose of recovering startup costs rapidly or when there is little threat of short-term competition.

 

PTS:   1                    REF:   p. 481-483     OBJ:   16-3 TYPE: C

NAT:  Communication | Finance

 

  1. After defining three pricing strategies, state when a small business would best use the strategy.

 

ANS:

Penetration Pricing:A technique based on setting lower than normal prices to hasten market acceptance of a product or service or to increase market share.  This strategy discourages new competitors from entering a market niche if they mistakenly view the price as a long term price. The concern for a small business using this strategy is some profit is lost because of the increased market penetration.

Skimming Pricing: A technique based on setting very high prices for a limited period before reducing them to more competitive levels. For companies who have prestige items, the method may work for a short time.  It is most beneficial when there is a small threat of competition or when startup costs need to be recovered rapidly.

Follow-the-Leader Pricing: A technique based on using a particular competitor as a model in setting prices. If the small business is in competition with a larger firm it will seldom be able to use this method. If another competitor sees the new business as a threat, they may retaliate and lower prices resulting in the pricing strategy achieving very little for the small business.

Variable Pricing: A technique based on setting more than one price for a product or service in order to offer price concessions to certain customers. This method is for companies who offer buyers a quantity discount or possibly a discount if the buyer is another business.

Dynamic Pricing: A technique based on charging more than the standard price when a customer’s profile suggests that the higher price will be accepted. This method would be used when a business has enough customer profile information to support the higher price.

Price Lining: A technique based on setting a range of several distinct merchandise price levels. It would be used when the customer selection process  and inventory needs to be simplified.

Pricing at What the Market Will Bear: is self explanatory and only used when a business has little or no competition.

 

PTS:   1                    REF:   p. 481-484     OBJ:   16-3 TYPE: C

NAT:  Communication | Finance

 

  1. Layla is a well-known successful movie star who recently retired and just started designing handbags. She has opened a boutique business in her home town 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 to utilize for her products. Which strategy would best fit her image and product?

 

ANS:

Layla should use a skimming pricing 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 hand-bags as prestigious. She has little competition which will help to recover startup costs more quickly if enough customers like her handbags.

 

PTS:   1                    REF:   p. 482            OBJ:   16-3 TYPE: A

NAT:  Communication | Finance

 

  1. List and describe the three types of credit.

 

ANS:

Consumer credit: is made of three types.

· Open charge accounts–customers obtain possession of goods at the time of purchase, with payment due when billed.
· Installment accounts–long-term consumer credit that requires a down payment and typically allows a repayment period of 12 to 60 months.
· Revolving charge accounts–seller grants a customer a line of credit, and charged purchases may not exceed it.

 

Credit cards: are also made of the three types.

· Bank credit cards-the most common are MasterCard and VISA and are widely accepted with a fee charged to the retailer.
· Entertainment credit cards – the most known are American Express and Diner’s Club and are also widely accepted and have a fee charged.
· Retailer credit cards – companies that offer these cards include department stores and oil companies which are only for their outlets.

 

Debit cards: are a variation on a credit card, and while not technically a credit card, there cards are an alternative to cash.

 

PTS:   1                    REF:   p. 486            OBJ:   16-4 TYPE: C

NAT:  Communication | Finance

 

  1. What are the five factors that entrepreneurs need to consider with deciding to accept credit.

 

ANS:

-Type of Business: If the product being sold has a longer life and is higher in price (appliance, furniture), than entrepreneurs will typically have credit options.  If the products are more disposable or perishable (food, clothing), the credit is typically not given to the customer by the business.

Credit Policies of Competitors: Most consumers will expect a similar policy unless the company has some advantage for the buyer.

-Age and Income Level of Customers: If a customer has a steady income which is typically more stable as people age, a company will be more inclined to extend credit.

-Availability of Working Capital: If limited working capital is possible such as when credit sales are given to buyers, then a business may decide to limit credit.

-Economic Conditions: Recessionary times impact customers, retailers, wholesalers and lenders leading to decreased extension of credit.  However, if a buyer meets the above criteria, a small business owner may offer credit to increase sales.

 

PTS:   1                    REF:   p. 485            OBJ:   16-4 TYPE: C

NAT:  Communication | Finance

 

  1. Discuss accounts receivable management methods in a small business.

 

ANS:

Answers will vary from student to student. However, the following list contains items that could be discussed in their answers.

· Analyze credit information on customers from credit bureaus.
· Use an aging schedule to forecast cash conversion rates.
· Use periodic billing statements.
· Establish adequate records and collection procedures.
· Compute a bad-debt ratio.
· Follow credit regulations and rules.

 

 

PTS:   1                    REF:   p. 490            OBJ:   16-5 TYPE: C

NAT:  Communication | Finance

 

  1. Guy owns a lumber yard working directly with home builders and contractors.  Margie, a contractor new to the area, wants to set up a credit account with the lumber yard. She has a good history of successful and profitable projects. What questions should Guy ask in evaluating the Margie’s credit status? Relate to the 5 C’s of credit.

 

ANS:

– Can Margie pay as promised? Since Margie is a new contractor, Guy must decide whether or not he thinks she will be able to have the funds needed to pay his business credit bill. How is Margie’s character?

Will the buyer pay? Margie is a new customer to Guy’s company. He needs to decide if he will be able to trust her to stay on track with her financial commitment. How is Margie’s capacity?

– If so, when will the buyer pay? Guy needs to consider how soon Margie will be able to repay the company. Will Margie have the capital?  Will conditions impact payment?

– If not, can the buyer be forced to pay? If Margie refuses to pay her bill, Guy needs to consider what other options he has to force payment. Does Margie have collateral that could be used in lieu of payment?

In short, Guy needs to consider Margie in relation to the 5 C’s of credit: character, capacity, capital, conditions and collateral.

 

PTS:   1                    REF:   p. 488            OBJ:   16-5 TYPE: A

NAT:  Communication | Finance

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