Deck 11: Strategic Cost Management

Question 1

The value of money spent any time in the future does not depend on the organization's cost of capital.

Answer 1

False

Question 2

Some sellers rely on a detailed analysis of internal cost structures to establish price, whereas others simply price at a level comparable to the competition.

Answer 2

True

Question 3

The opportunity cost of taking the supplier's cash discount is almost always higher than the opportunity cost of not taking the cash discount.

Answer 3

False

Question 4

Target pricing is an innovative approach used in the final stages of the new-product development cycle to establish a contract price between a buyer and a seller.

Question 5

At the highest levels of the organization, top management seldom uses break-even analysis as a strategic planning tool.

Question 6

Break-even analysis includes both cost and revenue data for an item to identify the point where revenue equals cost, and the expected profit or loss at different production volumes.

Question 7

Under traditional pricing approaches, product cost + profit = selling price.

Question 8

The major benefits from cost-reduction efforts occur when supply management is not involved early in the new-product/service development cycle.

Question 9

The main risk in target and cost-based pricing concerns volume variability.

Question 10

If total costs are less than target costs, the design must change or costs must be reduced.

Question 11

Strategic cost management approaches do not vary according to the stage of the product life cycle.

Question 12

In general, low-value generics in which a competitive market with many potential suppliers exists should emphasize total delivered price.

Question 13

In setting target prices and target costs, the new-product development team should bear in mind the cardinal rule of target costing: the target cost can never be violated.

Question 14

The difference between the supplier's price and the target cost becomes the strategic cost-reduction objective.

Question 15

Although a quantity discount has a positive effect on the purchase price, a buyer need not be cautious about the net impact on the total cost of an item.

Question 16

The market-share model is also known as the penetration pricing model and is an aggressive pricing approach for efficient producers because price is a direct function of cost.

Question 17

Identification of all costs provides the basis for establishing joint improvement targets.

Question 18

A should-cost model can lead the procurement manager to better understand elements of overhead, mark-ups on non-value-added costs, and other components that can undermine price inflation.

Question 19

The cost of a new product is no longer an outcome of the product design process; rather, it is an input to the process.

Question 20

Price analysis focuses simply on a seller's price with little or no consideration given to the actual cost of production.

Question 21

A seller's cost structure affects price because, in the long run, the seller must price at a level that covers all variable costs of production, contributes to some portion of fixed costs, and contributes to some level of profit.

Question 22

A major benefit of multiple sourcing is a lower price that results from the higher volumes offered to a supplier.

Question 23

A cost-based approach to supplier pricing is feasible when the seller contributes high added value to an item through direct or indirect labor and specialized expertise.

Question 24

In many cases, the price charged by a seller may have little or no relationship to actual costs.

Question 25

Examples of monopolies in the United States include the steel, automobile, and appliance industries.

Question 26

Under penetration pricing, using final price as a basis, the product is disaggregated into major subsystems, each of which has its own target cost.

Question 27

Economic conditions seldom determine whether a market is favorable to the seller or to the purchaser.

Question 28

Most large firms base purchase decisions and evaluate suppliers on only the cost elements of unit price, transportation, and tooling.

Question 29

When demand exceeds supply, a buyer's market exists, and prices generally decrease.

Question 30

When supply exceeds demand, a buyer's market exists, and prices generally move downward.

Question 31

Using a traditional pricing approach, the selling price - profit = the allowable product cost.

Question 32

The Consumer Price Index (CPI) tracks material price movements from quarter to quarter, is scaled to a base year (1988), and tracks the percentage increase in material commodity prices based on a sample of industrial purchasers.

Question 33

How well suppliers purchase their goods and services has no direct impact on purchase price.

Question 34

The price paid for purchased products and services has no direct impact on the end customer's perception of value provided by the organization.

Question 35

Purchasers impact price at the time they set the specifications for the product or service.

Question 36

With the increased amount of outsourcing occurring in every global company today, the majority of the cost of goods sold is driven by suppliers, which are outside the four walls of an organization.

Question 37

Traditional pricing practices have supported cooperative efforts to make design, product, and process improvements.

Question 38

As a product reaches its end of life, supply management cannot ignore the potential value of environmental initiatives to remanufacture, recycle, or refurbish products that are becoming obsolete.

Question 39

A cost-based approach to determining price is clearly appropriate for all purchased items.

Question 40

Building a TCO model is an easy task.

Question 41

In the _____, suppliers are typically concerned about capacity utilization, covering fixed cost, and retaining skilled labor during market slowdowns, when they are willing to reduce their prices until market conditions change.

A)revenue pricing model
B)market skimming model
C)penetration pricing model
D)market-share model
E)competition pricing model

Question 42

In the _____, prices are set to achieve a high profit on each unit by selling to supply managers who are willing to pay a higher price because of a lack of supply management sophistication or who are willing to pay for products or services of perceived higher value.

A)market skimming model
B)revenue pricing model
C)promotional pricing model
D)price volume model
E)competition pricing model

Question 43

In the _____, pricing is based on the fact that long-run profitability depends on the market share obtained by the supplier.

A)price volume model
B)market-share model
C)open market model
D)target pricing model
E)market skimming model

Question 44

Which of the following is not one of the common assumptions typically used in break-even analysis?

A)Fixed costs are never considered.
B)Fixed costs remain constant over the period and volumes considered.
C)Variable costs fluctuate in a linear fashion.
D)Revenues vary directly with volume.
E)Break-even analysis considers total costs rather than average costs.

Question 45

All of the following are opportunities for supplier cost reductions except _____.

A)process capability
B)plant utilization
C)learning-curve effect
D)ability to vote out the supplier's labor union
E)management capability

Question 46

_____ includes both cost and revenue data for an item to identify the point where revenue equals cost, and the expected profit or loss at different production volumes.

A)Make-buy analysis
B)TCO
C)Break-even analysis
D)Market-share pricing
E)None of these answers.

Question 47

_____ = (Quality + Technology + Service + Cycle Time) ÷ Price.

A)Cost
B)Efficiency
C)Value
D)Total cost
E)Target cost

Question 48

In should-cost modeling, _____ include those components the company has direct control or influence over.

A)direct costs
B)assumption variables
C)variable costs
D)decision variables
E)commodity prices

Question 49

The _____ strategy is based on determining the highest price that can be offered to the supply manager that will still be lower than the price offered by competitors.

A)penetration pricing model
B)market-share model
C)cash discount
D)revenue pricing model
E)competition pricing model

Question 50

A _____ is an analytical tool that identifies the primary external forces that are causing prices to either increase or decrease.

A)market analysis
B)total cost analysis
C)cost analysis
D)make-buy analysis
E)target price analysis

Question 51

In TCO, _____ is the amount paid to the supplier for the product, service, or capital equipment.

A)acquisition cost
B)usage cost
C)end-of-life cost
D)purchase price
E)opportunity cost

Question 52

The emphasis of the _____ is on obtaining sufficient current revenue to pay for operating cost rather than on profit.

A)price volume model
B)promotional pricing model
C)revenue pricing model
D)market skimming model
E)competition pricing model

Question 53

Which of the following is not one of the important factors to consider when building a TCO model?

A)Focus on the small and easily measurable costs first.
B)Building a TCO can be a costly and time-intensive activity.
C)Work in a team.
D)Make sure to obtain senior management buy-in before embarking on a full-fledged TCO.
E)When considering global sourcing, consider all of the relevant labor, quality, logistics, and import costs associated with the total supply chain.

Question 54

In TCO for a product, _____ include(s) all costs associated with converting the purchased part or material into the finished product and supporting it through its usable life.

A)purchase price
B)acquisition costs
C)end of life costs
D)opportunity costs
E)usage costs

Question 55

In the _____, the seller is willing to take a lower price because of the potential mass market appeal of the product, resulting in substantially higher sales volumes.

A)revenue pricing model
B)promotional pricing model
C)revenue pricing model
D)cash discount model
E)market-share model

Question 56

The _____ presents pricing for individual products and services that is set to enhance the sales of the overall product line rather than to ensure the profitability of each product.

A)price volume model
B)competition pricing model
C)market skimming model
D)promotional pricing model
E)revenue pricing model

Question 57

In should-cost modeling, _____ are any components not under the direct control of the buying or supplying company but those that have a significant influence on the outcome being modeled.

A)direct costs
B)assumption variables
C)overhead costs
D)transportation modes
E)decision variables

Question 58

Which of the following is not one of the questions that should be asked when analyzing a seller's pricing strategy?

A)Does the seller have a long-term pricing strategy, or is it short-term in nature?
B)Is the seller a price leader or a price follower?
C)How many employees does the seller's plant employ?
D)Is the seller attempting to establish entry barriers to other competitors by establishing a low price initially, then preparing to raise prices later in the future?
E)Is the seller using a cost-based pricing approach or a market-based pricing approach?

Question 59

_____ include(s) all costs incurred when a product, service, or capital equipment reaches the end of its usable life, net of amounts received from the sale of remaining product or the equipment (salvage value).

A)Net present value costs
B)Usage costs
C)Purchase price
D)End-of-life costs
E)Opportunity costs

Question 60

In the _____, the supplier establishes a price that will provide a profit margin that is a predetermined percentage of the quoted price, i.e., not a percentage of cost.

A)rate-of-return pricing model
B)margin pricing model
C)market-share model
D)competition pricing model
E)target costing model

Question 61

Which of the following statements regarding cost-savings sharing is false?

A)Cost-sharing approaches require joint identification of the full cost to produce an item.
B)Profit is a function of the productive investment committed to the purchased item and a supplier's asset return requirements.
C)The cost-based approach provides a supplier with incentives to pursue continuous performance improvement to realize shared cost savings and invest in productive assets.
D)Profit is a direct function of cost.
E)In the traditional market-based pricing approach, one party (usually the purchaser) seeks to capture all cost savings resulting from a supplier's improvement effort.

Question 62

In the _____, the supplier simply takes its estimate of costs and adds a markup percentage to obtain the desired profit.

A)margin pricing model
B)cost markup pricing model
C)total cost analysis model
D)penetration pricing model
E)revenue pricing model

Question 63

In TCO, _____ includes all costs associated with bringing the product, service, or capital equipment to the customer's location.

A)purchase price
B)opportunity costs
C)acquisition costs
D)usage costs
E)end of life costs

Question 64

In a/an _____ market structure, there exist identical products with minimal barriers for new suppliers to enter the market, and price is solely a function of the forces of supply and demand.

A)monopolistic
B)oligopolistic
C)communistic
D)perfect competition
E)Price is never solely a function of supply and demand, regardless of market structure.

Question 65

In should-cost modeling, _____ refers to the integrity and transparency of the cost model created.

A)direct cost
B)value stream maps
C)make-or-buy analysis
D)fixed cost
E)auditability

Question 66

The _____ is an approach to estimating the different components that make up the supplier's per unit price per unit of product or service, i.e., what the product or service should cost in a theoretical world.

A)market skimming model
B)make-buy analysis
C)competition pricing model
D)rate-of-return model
E)Should-cost model

Question 67

In TCO for a service, _____ include all costs associated with the performance of the service that are not included in the purchase price.

A)invoice costs
B)usage costs
C)acquisition costs
D)end of life costs
E)interest costs

Question 68

Which of the following is not one of the categories of products in the strategic cost management matrix?

A)Commodities.
B)One-time buys.
C)Critical products.
D)Unique products.
E)Generics.

Question 69

In should-cost modeling, the _____ provides a high level view of the supply chain, and then the supplier's primary cost elements are broken down into material, labor, overhead, transportation freight, inventory cost, maintenance costs, and others.

A)PPI
B)value stream map
C)target price
D)product specification
E)None of these answers.

Question 70

_____ indicates whether a seller can lower its cost as a result of the repetitive production of an item.

A)Process capability analysis
B)Market analysis
C)Price analysis
D)Break-even analysis
E)

Question 71

In TCO for capital equipment, _____ are all costs associated with operating the equipment through its life.

A)usage costs
B)end of life costs
C)opportunity costs
D)acquisition costs
E)training costs

Question 72

In the framework for strategic cost management, _____ are high-value products or services and can be sourced through traditional bidding approaches that require price analysis using market forces to do the work and identify what is a competitive price.

A)critical products
B)unique products
C)custom-made products
D)generics
E)commodities

Question 73

_____ refers to the process of comparing supplier prices against external price benchmarks, without direct knowledge of the supplier's costs.

A)Cost analysis
B)Make-buy analysis
C)Target costing
D)Price analysis
E)Total cost analysis

Question 74

In the _____, the desired profit is added to the estimated cost.

A)penetration pricing model
B)revenue pricing model
C)margin pricing model
D)rate-of-return pricing model
E)TCO model

Question 75

_____ applies the price/cost equation across multiple processes that span two or more organizations across a supply chain.

A)Make-buy analysis
B)Price analysis
C)Cost analysis
D)Target costing
E)Total cost analysis

Question 76

In _____, a purchaser may have to use internal engineering estimates about what it costs to produce an item, rely on historical experience and judgment to estimate costs, or review public financial documents to identify key cost data about the seller.

A)reverse price analysis
B)TCO analysis
C)penetration pricing
D)using the PPI
E)competition pricing

Question 77

A/An _____ is defined as the cost of the next best alternative.

A)operating cost
B)purchase price
C)net present value
D)usage cost
E)opportunity cost

Question 78

Which of the following is not an item or product that is an appropriate candidate for a cost-based pricing approach?

A)An item in which the seller contributes high added value through direct or indirect labor and specialized expertise.
B)A complex item customized to specific requirements.
C)A product requiring a conversion from raw material through value-added designs at a supplier.
D)A product requiring supplier-provided design and engineering support.
E)Commodity-like items.

Question 79

_____ is defined as the present value of all costs associated with a product, service, or capital equipment that are incurred over its expected life.

A)Cash flow analysis
B)Total cost of ownership
C)Make-buy analysis
D)Revenue pricing
E)Competition pricing

Question 80

_____ is the process of analyzing each individual cost element (i.e., material, labor hours and rates, overhead, general and administrative costs, and profit) that together add up to the final price.

A)Price analysis
B)Cost analysis
C)Target costing
D)Total cost analysis
E)Make-buy analysis