Deck 14: Price and Cost Analysis

Question 1

In the short run,a firm must recover all costs.

Answer 1

False

Question 2

In the long run,a firm must recover all costs or go out of business.In other words,facilities and machinery must be maintained,modernized,and replaced

Answer 2

True

Question 3

A commonly used discount is 2 / 10,net 30,which means that a discount of 2 percent is given if the invoice is paid within 10 days.

Answer 3

True

Question 4

When faced with the realities of competition,the price any specific firm will quote will be governed largely by the friendship the sellers have forged with the buyers.

Question 5

A market price is a price established by demand in a constant supply environment.

Question 6

A market price is a price established by supply and demand.

Question 7

SM requires that supply managers analyze acquisition costs from multiple perspectives,including the conditions of competition,seller's measurement system,discounts,regulations,legal implications and perhaps most importantly,what is "fair and reasonable" to all parties involved in the pending transactions.

Question 8

A selling firm tends to seek the highest price that is compatible with its long-range goals.

Question 9

The price developed through an independent cost estimate should be "fair and reasonable."

Question 10

In the short run a firm should recover fixed costs and some portion of overhead rather than undergo a significant decline in business.

Question 11

Independent cost estimates may be used as a basis for comparison of prices.

Question 12

Cost distortion usually exists in the supplier's pricing of products when the supplier sells a large variety of products,but applies overhead equally per unit.

Question 13

The right price is the one most beneficial to the buyer.

Question 14

Independent cost estimates should not be used if other methods are available.

Question 15

Price or acquisition cost,is usually the smallest component of total cost.

Question 16

Supply managers must analyze acquisition costs from multiple perspectives,including the conditions of competition,seller's measurement system,discounts,regulations,legal implications and perhaps most importantly,what will get the buying firm the lowest price involved in the pending transactions.

Question 17

Price or acquisition cost,is usually the largest component of total cost.

Question 18

The right price is a fair and reasonable price to both the buyer and the seller.

Question 19

In the short run a firm should recover variable costs and some portion of overhead rather than undergo a significant decline in business,unless such additional business would affect the pricing of current or future orders.

Question 20

The factors stemming from competition determine the exact price each firm will quote.That is,when faced with the realities of competition,the price any specific firm will quote will be governed largely by its need for business and by what it thinks its competitors will quote,not by costs or profits.

Question 21

Cost analysis is a review and an evaluation of actual or anticipated costs involving the application of experience,knowledge,and judgment to data in an attempt to project reasonable estimated contract costs.

Question 22

Cost analysis is generally most useful when purchasing nonstandard items and services than standard items and services.

Question 23

A learning curve is an empirical relationship between the number of units produced and the number of labor hours required to produce them.

Question 24

A commonly used discount is 2 / 10,net 30,which means that a discount of 10 percent is given if the invoice is paid within 30 days.

Question 25

A supply manager without an understanding of cost analysis and costing systems cannot individually aspire towards shifting his or her organization towards excellence.

Question 26

All companies have hidden costs that often reside in overhead.As a result,a supply professional needs an understanding of costs,cost systems,and overhead composition and allocation.

Question 27

Cost analysis provides little benefit in supply management activities such as negotiation,pricing,forecasting and alliance development.

Question 28

Cost Analysis should be employed even if a price analysis has allowed the buyer to reach the conclusion that a price is fair and reasonable.

Question 29

A supply manager does not require an understanding of cost analysis and costing systems to individually aspire towards shifting his or her organization towards world class performance.

Question 30

A learning curve effect is a quantitative model of the commonsense observation that the unit cost of a new product decreases as more units of the product is made because of the learning process.

Question 31

Cost analysis is generally most useful when purchasing standard items and services than when purchasing non-standard items and services.

Question 32

The cumulative average cost curve is commonly used in price and cost analysis.It plots cumulative units produced against the average direct labor cost or average labor hours required per unit for all units produced.

Question 33

The purpose of cost analysis is to arrive at a price that is fair and reasonable to both the buying and selling firms.

Question 34

The unit or marginal cost curve is used in labor and cost-estimating work.

Question 35

When price analysis is not possible,cost analysis becomes the basis of obtaining a fair and reasonable price.

Question 36

Once understood,cost analysis becomes a cornerstone of other supply management activities,such as negotiation,pricing,forecasting and alliance development.

Question 37

Independent cost estimates should never be used as a basis for comparison of prices.

Question 38

Cost distortion usually exists in the supplier's pricing of products when the supplier sells a low variety of products and applies overhead equally per unit.

Question 39

Cost Analysis should be employed when either a price analysis is impractical or price analysis does not allow a buyer to reach the conclusion that a price is fair and reasonable.

Question 40

Independent cost estimates should always be used,even if other easier and less expensive methods are available.

Question 41

Which of the following is not a common source of prices for a price analysis?

A) Catalog prices
B) Internet prices
C) Prices from an E-procurement system
D) Independent cost estimates
E) The grapevine

Question 42

The unit learning curve is commonly used in price and cost analysis.It plots cumulative units produced against the average direct labor cost or average labor hours required per unit for all units produced.

Question 43

The cumulative cost curve is most commonly used in labor and cost-estimating work.

Question 44

Which of the following is not a category of discounts?

A) Trade Discounts
B) Quantity Discounts
C) Credit Card Discounts
D) Seasonal Discounts
E) Cash Discounts

Question 45

A learning curve effect is a qualitative model of the belief that the new products should cost less as more are produced.

Question 46

What was not recommended by the textbook to be included in documentation in a price analysis report?

A) Whether to develop the supplier as an alliance
B) Information that was considered
C) Weight given to each piece of information and why
D) Logic supporting the determination that a seller's price is or is not reasonable
E) Soundness of that logic (logic supporting the determination that a seller's price is or is not reasonable)

Question 47

Which of the following is not true of direct costs?

A) Direct costs are normally the major portion of product or service costs
B) Direct costs are usually easily traceable
C) Direct costs generally serve as the basis for allocation of supplier overhead costs
D) Direct costs can vary a great deal depending upon the overhead allocation basis
E) A tiny reduction in direct costs is often worth more to the buying firm than a major reduction in the percentage of profit

Question 48

When using historical prices to set future prices,several questions should be asked about the historical data.Which of the following is not one of the questions as presented by the textbook?

A) How have conditions changed?
B) Were prices in the past determined by the laws of supply and demand?
C) Were there one-time engineering, setup, or tooling charges in the original price?
D) What should be the effect of inflation or deflation on the price?
E) Will the new procurement create a situation in which the supplier should enjoy the benefits of learning?

Question 49

Which of the following is not one of the six categories of cost presented in the textbook?

A) Price of Goods
B) Variable Manufacturing Costs
C) Fixed Manufacturing Costs
D) Semi Variable Costs
E) Total Production Costs

Question 50

Which of the following is not a recommendation given in the book with respect to competitive price proposals?

A) Confirm that none of the sources are bidding in foreign currencies
B) Confirm that at least two qualified sources have responded
C) Confirm that the supplier should compete independently for the award
D) Confirm that the supplier submitting the lowest offer does not have an unfair advantage over its competitors
E) Confirm that the lowest evaluated price is reasonable

Question 51

Which of the following is not a common use of learning curves?

A) Estimation of Target Costs
B) Improving Make-or-buy Analyses
C) Estimating Delivery Times
D) Estimation of Material Costs
E) Developing Supplier Progress Payment Schedules

Question 52

Few companies have hidden costs that reside in overhead.As a result,a supply professional need not gain an understanding of costs,cost systems,and overhead composition and allocation.

Question 53

Which of the following is not a fundamental type of competition?

A) Pure Competition - Supply and demand determines prices
B) Imperfect Competition - Monopolistic Competition
C) Imperfect Competition - Oligopoly
D) Monopoly - One seller controls entire supply
E) Federally Controlled - Government regulates competition

Question 54

Which of the following is not a potential problem with application of a learning curve?

A) Small payoffs compared to the work effort to include learning curves may make them unreasonable to include in an analysis
B) Incorrect learning rates
C) Learning curves generally do not apply to established items
D) Costs are more accurately forecasted
E) Misleading data can result

Question 55

Which of the following is not a common source of prices for a price analysis?

A) Competitive price proposals
B) Regulated prices
C) Mathematical modeling
D) Catalog prices
E) Market prices

Question 56

The purpose of cost analysis is to arrive at a price that is fair and reasonable from the perspective of the buying firm.

Question 57

Cost analysis is the same activity as a price analysis.

Question 58

Which of the following is not one of the six categories of cost presented in the textbook?

A) Mixed Costs
B) Total Production Costs
C) Fixed Service Costs
D) Direct Costs
E) Indirect Costs

Question 59

Which of the following is not considered a major element that affects a supplier's cost?

A) Effectiveness of competitors
B) Capabilities of management
C) Efficiency of labor
D) Amount and quality of subcontracting
E) Plant capacity and the continuity of output

Question 60

A learning curve is an empirical relationship between the number of units produced and the number of overhead hours required to produce them.

Question 61

Which of the following statements is typically not true about target costing?

A) Target costing focuses on the price the customer will be willing to pay for a product or service
B) After removing a reasonable profit from the price, the target cost is identified
C) Calculation of the target cost enables designers to focus on meeting the needs of the customer within the target cost constraint
D) Supply professionals can apply target costing to analyses of supplier's products and services
E) Target costing requires ABC

Question 62

Which of the following is a typical direct cost category?

A) Material Included in Product
B) Engineering Overhead
C) Material Overhead
D) Manufacturing Overhead
E) General and Administrative

Question 63

Several potential benefits exist when a buying firm pays for and takes title to special tooling.Which is not one of the potential benefits?

A) The buying firm gains greater control
B) Insurance costs are lower
C) Analysis of production costs is easier
D) Labor learning curve effect is reduced
E) Tooling can be moved if needed

Question 64

Which of the following is not a potential problem with application of a learning curve?

A) Non-uniform learning rate
B) Large learning curve effects
C) Low-labor-content items
D) Incorrect learning rates
E) Established items

Question 65

Which of the following statements is typically not true about activity based costing?

A) Improves the tracing of costs to the product or service that consumed the cost
B) Helps to identify costs that were arbitrarily allocated in the past using a volume based driver, such as direct labor
C) Identifies the true (or more logical) drivers of indirect costs
D) ABC is used by the majority of major corporations throughout the world
E) Examples of cost drivers used in ABC include: number of orders, length of setups, engineering changes

Question 66

When recovering indirect costs,the textbook provides several recommendations.Which is not one of the recommendations?

A) A supply professional must understand how the supplier estimates and applies overhead
B) Investigate whether the supplier uses outdated overhead allocation methods that no longer reflect the true costs of the products they produce and sell
C) A small error in estimating and applying overhead can significantly affect the final cost, so look for even small errors
D) Force the supplier to use Activity Based Costing methods in estimating costs given in their proposals and bids
E) A supply professional should motivate a selling firm with poor cost control to improve its system of collecting and applying costs to products

Question 67

Which of the following statements is typically not true about profit?

A) Products and services requiring highly technical personnel usually require higher profit
B) Coercing suppliers to lower prices always results in higher profit
C) Temporary, unfavorable supply-demand factors may force a firm to sell its products at a loss - resulting in no profit
D) A firm that incurs the risk of manufacturing to its own design is entitled to higher profit than one that does not
E) In general, supplier profit should not be based on a fixed percentage of the supplier's cost

Question 68

Which of the following statements is typically not true about profit?

A) Profit is the basic reward for risk taking as well as the reward for efficiency
B) A higher profit per unit is generally justified for small special orders
C) Products and services requiring highly technical personnel usually require higher profit
D) Per unit profit is generally lower for complex products that require special tooling and training to produce
E) A higher profit is generally justified for a firm that repeatedly turns out superbly reliable technical products