Supply Chain Management Test Bank - Chapter 16

Supply Chain Management, 6e (Chopra/Meindl)
Chapter 16 Pricing and Revenue Management in a Supply Chain
16.1 True/False Questions
1) Revenue management is the use of marketing to increase the profit generated from a limited
supply of supply chain assets.
Answer: FALSE
Diff: 2
Topic: 16.1 The Role of Pricing and Revenue Management in a Supply Chain
AACSB: Application of knowledge
Objective: LO 16.1: Understand the role of revenue management in a supply chain.
2) Pricing may influence demand if customers are price sensitive.

Answer: TRUE
Diff: 2
3) Revenue management may also be defined as the use of differential pricing based on customer
segment, time of use, and product or capacity availability to increase supply chain surplus.
Answer: TRUE
Diff: 2
4) Revenue management adjusts the pricing and available supply of assets to maximize profits.
Answer: TRUE
Diff: 1
5) In theory, the concept of differential pricing decreases total cost for a firm.
Answer: FALSE
Diff: 2
1
Cost Accounting: A Managerial Emphasis
6) To differentiate between the various market segments, the firm must either eliminate barriers
that identify product or service attributes the segments value differently.
Answer: FALSE
Diff: 1
Topic: 16.2 Pricing and Revenue Management for Multiple Customer Segments
AACSB: Analytical thinking
Objective: LO 16.2: Identify conditions under which revenue management tactics can be
effective.
7) In most instances of differential pricing, demand from the segment paying the lower price
arises earlier in time than demand from the segment paying the higher price.
Answer: TRUE
Diff: 2
effective.
8) Spoilage occurs when the capacity reserved for higher price buyers is wasted because demand
from the higher price segment does not materialize.
Answer: TRUE
Diff: 1
Objective: LO 16.3: Describe trade-offs that must be considered when making revenue
management decisions.
9) Wastage occurs if higher price buyers have to be turned away because the capacity has already
been committed to lower price buyers.
Answer: FALSE
Diff: 2
10) An order from a lower price buyer should be accepted if the expected revenue from a higher
price buyer is lower than the current revenue from the lower price buyer.
Answer: TRUE
Diff: 1
Topic: 16.3 Pricing and Revenue Management for Perishable Assets
2
11) Unused capacity from the past is extremely valuable.
Answer: FALSE
Diff: 1
12) The tactic of varying price over time is suitable for assets such as fashion apparel that have a
clear date beyond which they lose a lot of their value.
Answer: TRUE
Diff: 1
13) Effective differential pricing over time will generally increase the level of product
availability for the consumer willing to pay full price, but will decrease total profits for the
retailer.
Answer: FALSE
Diff: 2
14) The tactic of overbooking or overselling the available asset is suitable in any situation where
customers are able to cancel orders and the value of the asset drops significantly after a deadline.
Answer: TRUE
Diff: 1
15) The basic trade-off to consider during overbooking is between having wasted capacity (or
inventory) because of few cancellations or having a shortage of capacity (or inventory) because
of excessive cancellations.
Answer: FALSE
Diff: 2
3
16) The cost of wasted capacity is the margin that would have been generated if the capacity had
been used for production.
Answer: TRUE
Diff: 2
17) The cost of a capacity shortage is the increase in productivity that results from having to go
to a backup source.
Answer: FALSE
Diff: 2
18) The goal when making the overbooking decision is to maximize supply chain profits by
minimizing the cost of wasted capacity and the cost of capacity shortage.
Answer: TRUE
Diff: 2
19) The amount of the asset reserved for the higher price segment is such that the expected
marginal revenue from the higher priced segment is less than the price to the lower price
segment.
Answer: FALSE
Diff: 1
Topic: 16.4 Pricing and Revenue Management for Seasonal Demand
20) Faced with seasonal peaks, an effective revenue management tactic is to charge a higher
price during the peak period and a higher price during off-peak periods.
Answer: FALSE
Diff: 3
4
21) Shifting demand from peak to off-peak periods is beneficial if the discount given during the
off-peak period is more than offset by the decrease in cost because of a smaller peak and the
increase in revenue during the off-peak period.
Answer: TRUE
Diff: 1
22) The amount reserved for the spot market should be such that the expected marginal revenue
from the spot market equals the current revenue from a bulk sale.
Answer: TRUE
Diff: 2
23) The reserved quantity will be affected by the difference in margin between the spot market
and the bulk sale, but not the distribution of demand from the spot market.
Answer: FALSE
Diff: 2
24) Ultimately, a proper understanding of customer preferences and a quantification of the

impact of various tactics on consumer behavior are at the core of successful revenue
management.
Answer: TRUE
Diff: 2
25) Any asset that loses value over time is perishable.

Answer: TRUE
Diff: 3
Topic: 16.5 Pricing and Revenue Management for Bulk and Spot Contracts
5
26) The forecasting function is not necessary for most revenue management systems.
Answer: FALSE
Diff: 2
Topic: 16.6 Using Pricing and Revenue Management in Practice
27) The goal of optimization is to use forecasts of customer behavior to identify a revenue
management tactic that will be most effective.
Answer: TRUE
Diff: 1
28) Too low a level of overbooking will lead to unutilized assets and lost revenue.
Answer: TRUE
Diff: 1
29) Salespeople must understand the revenue management tactic in place so they can align their
sales pitch accordingly.
Answer: TRUE
Diff: 1
30) Customers will have a negative perception of revenue management tactics if they are simply
presented as a mechanism for extracting maximum revenue.
Answer: TRUE
Diff: 1
6
16.2 Multiple Choice Questions
1) Pricing can be used to

A) change available supply.
B) reduce supply chain costs.
C) influence demand if customers are price sensitive.
D) all of the above
Answer: C
Diff: 2
2) Revenue management is
A) the use of marketing tools to increase revenue.
B) the use of pricing to increase the profit generated from a limited supply of supply chain assets.
C) a process designed to determine the best use of funds generated through sales.
D) the use of accounting tools to monitor cash flow.
Answer: B
Diff: 3
3) The two forms of supply chain assets are

A) capacity and inventory.
B) capacity and revenue.
C) inventory and revenue.
D) inventory and warehouse space.
Answer: A
Diff: 1
7
4) Revenue management may be defined as
A) the use of differential costing based on product or capacity availability to decrease supply
chain cost.
B) the use of differential costing based on customer segment, time of use, and product or
capacity availability to increase profitability.
C) the use of differential pricing based on customer segment, time of use, and product or
capacity availability to decrease supply chain surplus.
D) the use of differential pricing based on customer segment, time of use, and product or
capacity availability to increase supply chain surplus.
Answer: D
Diff: 2
5) The use of differential pricing should

A) decrease total profits for a firm.
B) increase total profits for a firm.
C) increase capacity for a firm.
D) decrease capacity utilization for a firm.
Answer: B
Diff: 2
AACSB: Reflective thinking
6) To differentiate between the various market segments, the firm must

A) create barriers by identifying product or service attributes that the segments value differently.
B) eliminate barriers that identify product or service attributes that the segments value
differently.
C) negotiate separately with different market segments that value product or service attributes
differently.
D) develop pricing structures based on the volume of various product or service attributes.
Answer: A
Diff: 2
effective.
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7) In most instances of differential pricing, demand from the segment paying the lower price
A) arises earlier in time than demand from the segment paying the higher price.
B) arises later in time than demand from the segment paying the higher price.
C) arises about the same time as demand from the segment paying the higher price.
D) arises both earlier and later in time than demand from the segment paying the higher price.
Answer: A
Diff: 2
8) The basic trade-off to be considered by the supplier with production capacity is between
A) committing to an order from a high-price buyer or waiting for a lower price buyer to arrive
later on.
B) committing to an order from a lower price buyer or waiting for a high-price buyer to arrive
later on.
C) allowing the market to be controlled by price or capacity.
D) having marketing or operations establish the constraints within which orders are accepted.
Answer: B
Diff: 1
9) When the capacity reserved for higher price buyers is wasted because demand from the higher
price segment does not materialize, this is
A) spill.
B) spoilage.
C) wastage.
D) excess.
Answer: B
Diff: 2
9
10) If higher price buyers have to be turned away because the capacity has already been
committed to lower price buyers, this is
A) spill.
B) spoilage.
C) wastage.
D) excess.
Answer: A
Diff: 2
11) An order from a lower price buyer

A) should always be accepted rather than waiting for potential revenue from a higher price buyer.
B) should only be accepted if the expected revenue from a higher price buyer is higher than the
current revenue from the lower price buyer.
C) should be accepted if the expected revenue from a higher price buyer is lower than the current
revenue from the lower price buyer.
D) should not be accepted if the expected revenue from a higher price buyer is lower than the
current revenue from the lower price buyer.
Answer: C
Diff: 1
12) The amount of the asset reserved for the higher price segment is such that
A) all orders from the lower priced segment will be accepted and filled.
B) the expected marginal revenue from the higher priced segment is more than the price to the
lower price segment.
C) the expected marginal revenue from the higher priced segment is less than the price to the
lower price segment.
D) the expected marginal revenue from the higher priced segment equals the price to the lower
price segment.
Answer: D
Diff: 2
10
Scenario 16.1 - The Stone Lion
The Stone Lion, a bed and breakfast located in a sleepy town, caters to two groups of customers,
young couples interested in something marginally more exotic than a staycation, and corporate
clients interested in doing some team-building at a location with no cellular service. Corporations
know they can get rooms with minimal notice, but young couples on tight budgets tend to plan
well in advance of their planned stay at the property. The corporate rate for rooms is $250 per
person and the demand pattern is normal with a mean of 20 and a standard deviation of 10. The
proprietor of the Stone Lion takes pity on the young couples and charges them only $150 for
identical accommodations.
13) How many rooms should be reserved for corporate clients?

A) 17
B) 14
C) 13
D) 10
Answer: A
Diff: 2
14) If the price young couples are willing to pay increases by 50%, how many rooms should be
reserved for corporate clients?
A) 17
B) 7
C) 4
D) 10
Answer: B
Diff: 2
11
15) If the corporate demand and standard deviation both decrease by 50%, how many rooms
should be reserved for corporate clients?
A) 7
B) 8
C) 9
D) 10
Answer: C
Diff: 2
16) What is the difference in the number of rooms that should be held by the Stone Lion if the
standard deviation of corporate demand increases by five and if it decreases by five?
A) 1
B) 2
C) 3
D) 4
Answer: C
Diff: 3
17) If the corporate price and young couples' price both double, how many additional rooms
should the Stone Lion hold for corporate clients?
A) 3
B) 2
C) 1
D) 0
Answer: D
Diff: 2
12
18) The tactic of varying price over time is suitable for assets
A) that do not have a clear date beyond which they lose a lot of their value.
B) that have a clear date beyond which they lose a lot of their value.
C) where customers are able to cancel orders and the value of the asset drops significantly after a
deadline.
D) where customers are unable to cancel orders and the value of the asset drops significantly
after a deadline.
Answer: B
Diff: 2
effective.
19) Effective differential pricing over time will generally

A) decrease the level of product availability for the consumer willing to pay full price and also
decrease total profits for the retailer.
B) decrease the level of product availability for the consumer willing to pay full price but will
increase total profits for the retailer.
C) increase the level of product availability for the consumer willing to pay full price and also
increase total profits for the retailer.
D) increase the level of product availability for the consumer willing to pay full price but will
decrease total profits for the retailer.
Answer: C
Diff: 2
effective.
20) The tactic of overbooking or overselling the available asset is suitable where
A) there is a clear date beyond which the asset loses a lot of its value.
B) there is no clear date beyond which the asset loses a lot of its value.
C) customers are able to cancel orders and the value of the asset drops significantly after a
deadline.
D) customers are unable to cancel orders and the value of the asset drops significantly after a
deadline.
Answer: C
Diff: 2
effective.
13
21) The basic trade-off to consider during overbooking is between
A) having wasted capacity (or inventory) or a shortage of capacity (or inventory).
B) having lost sales or a shortage of capacity (or inventory).
C) having wasted capacity (or inventory) or excess capacity (or inventory).
D) having high sales or a shortage of capacity (or inventory).
Answer: A
Diff: 2
22) Wasted capacity (or inventory) occurs when

A) there are excessive cancellations.
B) there are few cancellations.
C) an expensive backup needs to be arranged.
D) all of the above
Answer: A
Diff: 1
23) A shortage of capacity (or inventory) occurs when

A) there are excessive cancellations.
B) there are few cancellations.
C) an expensive backup needs to be arranged.
D) B and C only
Answer: B
Diff: 1
24) The cost of wasted capacity is

A) the reduction in margin that results from having to go to a backup source.
B) the margin that would have been generated if the capacity had been used for production.
C) the productivity increase generated when the capacity is used for production.
D) the sales potential of excess capacity kept in reserve for emergency production.
Answer: B
Diff: 2
14
25) The cost of a capacity shortage is
A) the reduction in margin that results from having to go to a backup source.
B) the margin that would have been generated if the capacity had been used for production.
C) the productivity increase generated when the capacity is used for production.
D) the sales potential of excess capacity kept in reserve for emergency production.
Answer: A
Diff: 2
26) The goal when making the overbooking decision is to maximize supply chain profits by
A) maximizing the value of wasted capacity and the cost of capacity shortage.
B) maximizing supply chain profits.
C) minimizing the cost of wasted capacity and the cost of capacity shortage.
D) minimizing the cost of wasted capacity and minimizing capacity shortages.
Answer: C
Diff: 2
27) An effective revenue management tactic when faced with seasonal peaks is to charge a
A) high price during the peak period and a higher price during off-peak periods.
B) higher price during the peak period and a lower price during off-peak periods.
C) lower price during the peak period and a higher price during off-peak periods.
D) low price during the peak period and a lower price during off-peak periods.
Answer: B
Diff: 2
15
Scenario 16.2 - Card Table Vendor
The traditional fundraiser for the student chapter of APICS is pint mason jars filled with a tangy
barbecue sauce that the club sponsor whips up in his kitchen. Club officers set up a card table in
the atrium of the business building and take turns staffing it for the duration of the barbecue
season, which is four months. Eighteen sad years of experience have revealed that demand varies
depending on the month of the season. Customer demand in the first month can be described as
400-p1, in the second month as 400-1.4p2, in the third month 400-1.8p3, and in the fourth month
400-2.2p4.
28) What should the price be in period 1?

A) $287.50
B) $275.00
C) $262.50
D) $250.00
Answer: C
Diff: 3
29) What should the price be in period 3?

A) $185.13
B) $181.27
C) $177.43
D) $173.61
Answer: D
Diff: 3
30) What is the expected revenue if the student APICS chapter uses dynamic pricing?
A) $83,975.47
B) $84,349.06
C) $84,719.84
D) $85,209.84
Answer: A
Diff: 3
16
31) Responding to customer complaints (primarily from period 1 purchasers) the student APICS
chapter decides to use static pricing over the four month season. What is the optimal price to
charge for their barbecue sauce?
A) $122.50
B) $125.00
C) $127.50
D) $130.00
Answer: B
Diff: 3
32) Responding to customer complaints (primarily from period 1 purchasers) the student APICS
chapter decides to use static pricing over the four month season. What is the total revenue for the
season's sales at the optimal price?
A) $49,490.00
B) $494,747.50
C) $50,000.00
D) $50,247.50
Answer: C
Diff: 3
17
Scenario 16.3 - AITP's Revenge
The student chapter of the Association of Information technology Professionals (AITP) notices
the success that the APICS student chapter has with their traditional barbecue sauce fundraiser.
Blinded by their jealousy, the club officers decide to sell a competing product, clocks made out
of junk computer parts that the club sponsor whips up in his garage. Club officers set up a card
table in the atrium of the business building and take turns staffing it for the duration of the
computer clock season, which is four months. Twenty-five years of experience have revealed that
demand varies depending on the month of the season. Customer demand in the first month can
be described as 20-p1, in the second month as 20-1.4p2, in the third month 20-1.8p3, and in the
fourth month 20-2.2p4.
33) The components needed to produce a computer clock cost twenty-five cents. What should the
price of the computer clocks be in the first month of the selling season?
A) $5.68
B) $7.27
C) $10.13
D) $14.52
Answer: C
Diff: 3
34) The components needed to produce a computer clock cost twenty-five cents. What should the
price of the computer clocks be in the third month of the selling season?
A) $14.52
B) $10.13
C) $7.27
D) $5.68
Answer: D
Diff: 3
35) The components needed to produce a computer clock cost twenty-five cents. How many
clocks should the AITP club produce?
A) 39
B) 47
C) 55
D) 63
Answer: A
Diff: 3
18
36) The components needed to produce a computer clock cost twenty-five cents. What is the
expected profit if the AITP club sponsor produces the optimal number of clocks?
A) $263.72
B) $262.54
C) $260.97
D) $269.41
Answer: B
Diff: 3
37) Shifting demand from peak to off-peak periods is beneficial if the discount given
A) during the off-peak period is more than offset by the decrease in cost because of a larger peak.
B) during the off-peak period is more than offset by the decrease in cost because of a smaller
peak.
C) during the peak period is more than offset by the decrease in cost because of a smaller peak.
D) during the peak period is more than offset by the decrease in cost because of a larger peak.
Answer: A
Diff: 2
38) Hotels use differential pricing by day of week and time of year
A) in order to shift demand from peak periods to off-peak periods.
B) in order to increase demand during off-peak periods.
C) in order to shift revenue from peak periods to off-peak periods.
D) in order to shift profit from peak periods to off-peak periods.
Answer: B
Diff: 2
19
39) Most firms must decide what fraction of an asset to
A) sell in bulk and what fraction of the asset to discard.
B) save for the spot market and what fraction of the asset to discard.
C) save for emergencies and what fraction of the asset to rework.
D) sell in bulk and what fraction of the asset to save for the spot market.
Answer: D
Diff: 2
40) The fundamental trade-off between selling in bulk or on the spot market is
A) different from the situation where a firm serves two market segments.
B) similar to the case when a firm serves two market segments.
C) similar to the case where a firm must deal with seasonal demand.
D) similar to the case where a firm has a perishable asset.
Answer: B
Diff: 3
41) The amount reserved for the spot market should be

A) such that the expected marginal revenue from the spot market equals the current revenue from
a bulk sale.
B) such that the expected marginal revenue from the spot market exceeds the current revenue
from a bulk sale.
C) such that the expected marginal revenue from the spot market is less than the current revenue
from a bulk sale.
D) equal to the maximum revenue available from the spot.
Answer: A
Diff: 3
20
Scenario 16.4 - Santorini Donkeys
Sturdy little donkeys are used to carry corpulent tourists up the Santorini caldera to the town of
Fira. One cruise line that routinely docks at the port is considering a plan to maintain their own
donkey herd, which will cost them $15,000 per thousand tourists. The number of tourists needing
this service is normally distributed, with a mean of Usually, this is enough donkey capacity, but
occasionally the cruise line rotates a bigger ship through this route and the excursion director
must purchase donkey capacity on the spot market, where is costs $20 per tourist.
42) How many donkeys should the cruise line have in its herd?
A) 8,111
B) 7,977
C) 7,842
D) 7,707
Answer: B
Diff: 3
43) Once a local donkey herder learns of the cruise line's plan, he raises his donkey rental price
to $25 per tourist. How many donkeys should be in the cruise line's herd?
A) 9,111
B) 8,971
C) 9,139
D) 8,707
Answer: C
Diff: 3
44) Once a local donkey herder learns of the cruise line's plan, he lowers his donkey rental price
to $17.50 per tourist. How many donkeys should be in the cruise line's herd?
A) 7,264
B) 7,005
C) 6,711
D) 6,370
Answer: D
Diff: 3
21
45) The cruise line's insurance policy limits the number of donkeys in their herd to 5,000. What
bulk price should the cruise line negotiate to make the 5,000 donkey herd size optimal?
A) $18,586 per ten thousand
B) $18,362 per ten thousand
C) $18,134 per ten thousand
D) $17,978 per ten thousand
Answer: A
Diff: 3
46) The forecasting function is

A) the foundation of any revenue management system.
B) unnecessary for a revenue management system.
C) an added plus for any revenue management system.
D) likely to create problems for any revenue management system.
Answer: A
Diff: 2
47) The goal of optimization in revenue management is to identify a tactic

A) using forecasts of customer behavior that will be most effective.
B) using linear regression that will maximize revenue.
C) using linear regression that will minimize cost.
D) that will not have to be altered.
Answer: A
Diff: 2
48) The decision to use overbooking will

A) lead to upset customers and a high cost of providing them space.
B) lead to unutilized assets and lost revenue.
C) lead to reduced profits.
D) depend upon optimization to be successful.
Answer: D
Diff: 2
22
49) It is important for the firm to structure its revenue management program in a way that
A) it is presented simply as a mechanism for extracting maximum revenue.
B) revenue increases while improving service along some dimension that is important to
customers that pay the highest price.
C) profit is maximized.
D) all of the above
Answer: B
Diff: 2
50) In order to achieve the greatest value

A) supply planning and revenue management should be performed separately.
B) supply planning should be completed first.
C) supply planning and revenue management should be combined.
D) revenue management should be completed first.
Answer: C
Diff: 3
16.3 Essay Questions
1) Describe the role of revenue management.

Answer: Pricing is an important lever to increase supply chain profits by better matching supply
and demand. Pricing may influence demand if customers are price sensitive. Revenue
management is the use of pricing to increase the profit generated from a limited supply of supply
chain assets. Supply chain assets exist in two forms–capacity and inventory. Capacity assets in
the supply chain exist for production, transportation, and storage. Inventory assets exist
throughout the supply chain and are carried to improve product availability.
Management decisions should try to maximize the total margin earned from these assets. To
increase the total margin, managers must use all available levers, including price. This is the
primary role of revenue management. Traditionally, firms have often invested in or eliminated
assets to reduce the imbalance between supply and demand. Firms build additional capacity
during the growth part of a business cycle and shut some of the capacity down during a
downturn. Ideas from revenue management suggest that a firm should first use pricing to achieve
some balance between supply and demand, and only then invest in or eliminate assets. Revenue
management may also be defined as the use of differential pricing based on customer segment,
time of use, and product or capacity availability to increase supply chain surplus.
Diff: 2
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2) Explain how revenue management is beneficial.
Answer: Revenue management adjusts the pricing and available supply of assets to maximize
profits. Revenue management has a significant impact on supply chain profitability when one or
more of the following four conditions exist:
1. The value of the product varies in different market segments.
2. The product is highly perishable or product wastage occurs.
3. Demand has seasonal and other peaks.
4. The product is sold both in bulk and the spot market.
Revenue management can be a powerful tool for every owner of assets in a supply chain.
Owners of any form of capacity (production, transportation, or storage) can use revenue
management if there is seasonal demand or if there are segments that are willing to pay different
prices for different lead times to use the capacity. Revenue management can be effective if there
is a segment that wants to use capacity at the last minute and is willing to pay for it, and there is
another segment that wants a lower price and is willing to commit far in advance. Revenue
management is essential for owners of any perishable inventory. Most successful examples of the
use of revenue management are from the travel and hospitality industry and include airlines, car
rentals, and hotels. Revenue management can have a similar impact on all stages of a supply
chain that satisfy one or more of these four conditions.
Diff: 2
3) Explain how differential pricing can benefit a firm.

Answer: If a supplier serves multiple customer segments with a fixed asset, he or she can
improve revenues by setting different prices for each segment. In theory, the concept of
differential pricing increases total profits for a firm. There are two fundamental issues, however,
that must be handled in practice. First, the firm must differentiate between the two segments and
structure its pricing to make one segment pay more than the other. To differentiate between the
various segments, the firm must create barriers by identifying product or service attributes that
the segments value differently. Second, the firm must control demand such that the lower paying
segment does not utilize the entire availability of the asset. The amount of the asset reserved for
the higher price segment is such that the expected marginal revenue from the higher priced
segment equals the price to the lower price segment. Prices must be set with barriers such that
the segment willing to pay more is not able to pay the lower price.
To successfully use revenue management when serving multiple customer segments, a firm must
use the following tactics effectively:
• Price based on the value assigned by each segment.
• Use different prices for each segment.
• Forecast at the segment level.
Diff: 2
24
4) How do firms address the problems of spoilage and spill?
Answer: In most instances of differential pricing, demand from the segment paying the lower
price arises earlier in time than demand from the segment paying the higher price. The basic
trade-off to be considered by the supplier with production capacity is between committing to an
order from a lower price buyer and waiting for a high-price buyer to arrive later on. The two
risks in such a situation are spoilage and spill. Spoilage occurs when the capacity reserved for
higher price buyers is wasted because demand from the higher price segment does not
materialize. Spill occurs if higher price buyers have to be turned away because the capacity has
already been committed to lower price buyers.
The supplier should decide on the capacity to commit for the higher price buyers so as to
minimize the expected cost of spoilage and spill. A current order from a lower price buyer should
be compared with the expected revenue from waiting for a higher price buyer. The order from the
lower price buyer should be accepted if the expected revenue from the higher price buyer is
lower than the current revenue from the lower price buyer.
Diff: 2
5) How can firms address the problem of perishable assets?

Answer: Any asset that loses value over time is perishable.
The two revenue management tactics used for perishable assets are:
1. Vary price over time to maximize expected revenue.
2. Overbook sales of the asset to account for cancellations.
The tactic of varying price over time is suitable for assets such as fashion apparel that have a
clear date beyond which they lose a lot of their value. To effectively vary price over time for a
perishable asset, the asset owner must be able to estimate the value of the asset over time and
effectively forecast the impact of price on customer demand. Effective differential pricing over
time will generally increase the level of product availability for the consumer willing to pay full
price and also increase total profits for the retailer.
The tactic of overbooking or overselling the available asset is suitable in any situation where
customers are able to cancel orders and the value of the asset drops significantly after a deadline.
If the cancellation or the return rate can be predicted accurately, the overbooking level is easy to
determine. In practice, however, the cancellation or return rate is uncertain.
25
The basic trade-off to consider during overbooking is between having wasted capacity (or
inventory) because of excessive cancellations and having a shortage of capacity (or inventory)
because of few cancellations, in which case an expensive backup needs to be arranged. The cost
of wasted capacity is the margin that would have been generated if the capacity had been used
for production. The cost of a capacity shortage is the reduction in margin that results from having
to go to a backup source. The goal when making the overbooking decision is to maximize supply
chain profits by minimizing the cost of wasted capacity and the cost of capacity shortage.
Diff: 2
6) Explain why forecasting is important to revenue management.

Answer: The foundation of any revenue management system is the forecasting function. To use
overbooking with any degree of success, a firm must be able to forecast cancellation patterns.
Forecasting does not mean obtaining an estimate that is always accurate. Forecasting involves
estimating demand and also attributing an expected error to the forecast itself. Both the estimated
value and the expected error are important inputs into any revenue management model. Finally,
as new information becomes available, reforecast to see if the revenue management tactics
currently in place are still appropriate. The frequency of forecasting will depend on the amount
of market activity. Ideally, the forecast and the revenue management decision should be
evaluated after every transaction.
Diff: 2
7) A manufacturer of industrial sales has production capacity of 1,000 units per day. Currently,
the firm sells production capacity for $10 per unit. At this price, all production capacity gets
booked about one week in advance. A group of customers have said that they would be willing to
pay $15 per unit if capacity was available on the last day. About ten days in advance, demand for
the high-price segment is normally distributed with a mean of 250 and a standard deviation of
100. How much production capacity should the manufacturer reserve for the last day?
Answer:
Revenue from segment A, pA = $15 per unit
Revenue from segment B, pB = $10 per unit
Mean demand for segment A, DA = 250 units
Standard deviation of demand for segment A, σA = 100 units
CA = NORMINV(1 - pB/pA, DA, σA)

= NORMINV(1 — 10/15, 250, 100)
= 206.9272 ≈ 207 units of capacity
Diff: 2
AACSB: Information technology
26

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What is revenue management and how does it differ from pricing?

What is revenue management and how does it differ from pricing?

What are some challenges of using differential pricing?

What are some challenges of using differential pricing?

Supply Chain Management, 6e (Chopra/Meindl)

Chapter 16 Pricing and Revenue Management in a Supply Chain

16.1 True/False Questions

2) Pricing may influence demand if customers are price sensitive.

24) Ultimately, a proper understanding of customer preferences and a quantification of the

25) Any asset that loses value over time is perishable.

1) Pricing can be used to

3) The two forms of supply chain assets are

5) The use of differential pricing should

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

11) An order from a lower price buyer

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

19) Effective differential pricing over time will generally

22) Wasted capacity (or inventory) occurs when

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

24) The cost of wasted capacity is

28) What should the price be in period 1?

29) What should the price be in period 3?

41) The amount reserved for the spot market should be

46) The forecasting function is

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

48) The decision to use overbooking will

50) In order to achieve the greatest value

16.3 Essay Questions

1) Describe the role of revenue management.

3) Explain how differential pricing can benefit a firm.

5) How can firms address the problem of perishable assets?

6) Explain why forecasting is important to revenue management.

CA = NORMINV(1 - pB/pA, DA, σA)

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