CBO Business Operations Management 5 — Questions and Answers
Question 1: A business is experiencing a bottleneck in its production process. According to the Theory of Constraints, what should be the first step?
- Hire additional workers throughout all departments
- Identify and exploit the constraint before elevating it (Correct answer)
- Outsource the bottleneck process immediately
- Reduce the output target to match the bottleneck capacity
Correct answer: Identify and exploit the constraint before elevating it
The Theory of Constraints prescribes first identifying the constraint, then exploiting it to maximize its output before investing in additional capacity.
Question 2: A franchise operator must balance following the franchisor's system with local market needs. Which operational document typically governs this relationship?
- Articles of Incorporation
- Franchise Disclosure Document (FDD) and franchise agreement (Correct answer)
- Operating agreement
- Memorandum of Understanding
Correct answer: Franchise Disclosure Document (FDD) and franchise agreement
The FDD (required by FTC) and franchise agreement together define the rights, obligations, fees, and operational standards governing the franchisee-franchisor relationship.
Question 3: Which risk management strategy involves purchasing insurance to handle potential financial losses?
- Risk avoidance
- Risk reduction
- Risk transfer (Correct answer)
- Risk acceptance
Correct answer: Risk transfer
Risk transfer shifts the financial consequences of a risk to a third party, most commonly through insurance policies.
Question 4: A business operator is analyzing customer profitability and finds that 20% of customers generate 80% of revenue. This observation reflects which principle?
- The law of diminishing returns
- The Pareto Principle (Correct answer)
- Porter's value chain
- The learning curve effect
Correct answer: The Pareto Principle
The Pareto Principle (80/20 rule) states that roughly 80% of effects come from 20% of causes, commonly observed in customer revenue distributions.
Question 5: A business is required to collect and remit sales tax. Which government authority establishes the sales tax rate and rules for a retail business operating in Texas?
- The IRS
- The Texas Comptroller of Public Accounts (Correct answer)
- The U.S. Department of Commerce
- The Federal Reserve
Correct answer: The Texas Comptroller of Public Accounts
Sales tax is a state and local tax administered by the state's revenue agency; in Texas, the Texas Comptroller of Public Accounts oversees sales tax compliance.
Question 6: When negotiating with vendors, a business operator successfully reduces payment terms from net 30 to net 60. What is the primary operational benefit?
- It reduces the unit cost of goods purchased
- It improves the business's cash flow by extending time before payment is due (Correct answer)
- It qualifies the business for volume discounts
- It reduces the business's accounts receivable balance
Correct answer: It improves the business's cash flow by extending time before payment is due
Extending payment terms from 30 to 60 days gives the business an additional 30 days to collect revenue before paying suppliers, improving working capital.
Question 7: A business operator is evaluating whether to make a component in-house or outsource it. Which cost should NOT be included in the make-or-buy analysis?
- Direct materials and labor for in-house production
- Sunk costs already incurred on existing equipment (Correct answer)
- Opportunity cost of the capacity used for production
- Variable overhead costs attributable to the component
Correct answer: Sunk costs already incurred on existing equipment
Sunk costs are past expenditures that cannot be recovered and are irrelevant to future decisions like make-or-buy analysis.
CBO Business Operations Management 5
A business is experiencing a bottleneck in its production process.
According to the Theory of Constraints, what should be the first step?