Cost and Economic Analysis Flashcards

An economic analysis is being conducted for a major defense acquisition program. A significant amount of money has already been spent on research and development in prior fiscal years. According to DoD Instruction 7041.03, how should these prior expenditures be treated in the analysis of alternatives?

Answer: They should be treated as sunk costs and excluded from the comparison of alternatives.

DoDI 7041.03 states that sunk costs, which are costs that have already been incurred and cannot be recovered, should not be included in the comparison of future alternatives. The analysis should focus on the future costs and benefits that differ among the alternatives being considered.

A program office is evaluating three potential modifications to an existing radar system. Each modification provides the same level of performance improvement. The primary goal is to select the most financially viable option. Which of the following analytical methods would be most appropriate for this decision?

Answer: Cost-Effectiveness Analysis (CEA)

Cost-Effectiveness Analysis (CEA) is the ideal method when the benefits or outputs of all alternatives are considered equal. The analysis then focuses on identifying the alternative that achieves the objective at the lowest life-cycle cost. Since all modifications provide the same performance improvement, the decision should be based on the least costly option.

Which of the following best describes a 'variable cost' in the context of defense contracting?

Answer: A cost that changes in total in direct proportion to the number of units produced, such as raw materials.

A variable cost is a cost that fluctuates in total with the volume of production or activity. For example, the cost of materials for each missile produced is a variable cost; the more missiles produced, the higher the total material cost.

A project manager is developing a cost estimate for a new software system. Historical data from a similar, recently completed project is available. The manager adjusts the historical cost data to account for differences in software complexity and size. Which cost estimating method is being used?

Answer: Analogy

The analogy method involves using the actual costs of a similar, completed project to estimate the cost of a new project. Adjustments are made to account for differences between the two projects, as described in the scenario.

Per DoD Instruction 7041.03, "Economic Analysis for Decision-making," an economic analysis is required for a wide variety of resource allocation decisions. Which of the following is an example of a situation explicitly requiring an economic analysis?

Answer: The decision to expand an existing program or project.

DoDI 7041.03 applies to decisions involving the "startup research, acquisition, renewal, renovation, conversion, upgrade, expansion, pre-planned product improvement, leasing, or operations of all programs or projects." The expansion of an existing program falls directly under this guidance.

A Cost-Benefit Analysis (CBA) has been prepared for a new military housing project. The analysis monetizes both the costs (construction, maintenance) and the benefits (reduced housing allowances, improved morale leading to higher retention). To compare costs and benefits that occur at different times, they must be adjusted to a common point in time. What is this process called?

Answer: Discounting

Discounting is the process of converting future costs and benefits to their present value. This is essential in a CBA because a dollar received today is worth more than a dollar received in the future. OMB Circular A-94 provides the specific discount rates to be used for federal programs.