Procurement Planning & Cost Analysis Flashcards

A buyer is evaluating whether to produce a component in-house or outsource it. Which cost should be EXCLUDED from the make-or-buy comparison?

Answer: Sunk costs of equipment already purchased and fully paid

Sunk costs cannot be recovered regardless of the decision, so they are irrelevant to make-or-buy analysis.

Fixed costs are $50,000, selling price is $25 per unit, and variable cost is $15 per unit. What is the break-even volume?

Answer: 5,000 units

Break-even = fixed costs / (price - variable cost) = 50,000 / 10 = 5,000 units.

Under an 80% learning curve, if the first unit takes 100 labor hours, how many hours should the fourth unit take?

Answer: 64 hours

Each doubling of cumulative output reduces time to 80%: 100 to 80 (unit 2) to 64 (unit 4).

Which approach builds an estimate of what a product SHOULD cost based on materials, labor, overhead, and reasonable profit?

Answer: Should-cost analysis

Should-cost modeling estimates an item's efficient cost from its component cost elements to support negotiation.

A procurement team aggregates purchase data across business units to identify consolidation opportunities. This activity is called:

Answer: Spend analysis

Spend analysis collects, cleanses, and categorizes spend data to reveal leverage and savings opportunities.

A supplier offers a payment of $1,100 one year from now. At a 10% discount rate, what is its present value?

Answer: $1,000

PV = 1,100 / (1 + 0.10) = $1,000.

Which item is MOST likely to be overlooked when comparing suppliers on unit price alone rather than total cost of ownership?

Answer: Maintenance, downtime, and disposal costs

TCO captures post-purchase costs such as maintenance, downtime, and disposal that unit price ignores.