Cost Analysis & Total Cost of Ownership Flashcards
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Which cost element is most commonly overlooked when calculating Total Cost of Ownership (TCO) for capital equipment?
Answer: End-of-life disposal and decommissioning costs
End-of-life disposal costs are frequently omitted from TCO calculations despite being significant, especially for hazardous or regulated equipment.
A supplier offers a unit price of $50 with $5,000 in annual tooling maintenance fees. A competitor offers $55 per unit with no additional fees. At what annual volume do both options cost the same?
Answer: 1,000 units
At 1,000 units: Supplier A = $50,000 + $5,000 = $55,000; Supplier B = $55 × 1,000 = $55,000 — the breakeven point.
In cost analysis, the term 'should-cost' model refers to:
Answer: A buyer's independent estimate of what a product or service ought to cost based on its components
A should-cost model is a buyer-developed estimate based on materials, labor, overhead, and profit to use as a negotiation baseline.
Which of the following best describes 'price analysis' as opposed to 'cost analysis'?
Answer: Price analysis compares the offered price to market benchmarks without examining underlying costs; cost analysis examines cost elements
Price analysis evaluates whether a price is reasonable by comparison to the market, while cost analysis dissects the underlying cost components.
A buyer is evaluating a 5-year software contract. Which TCO component would NOT typically be included?
Answer: The vendor's R&D investment in developing the software
The vendor's internal R&D investment is a sunk cost for the vendor, not a cost borne by the buyer, and is not part of the buyer's TCO.
Fixed costs per unit decrease as production volume increases. This phenomenon is known as:
Answer: Economies of scale
Economies of scale describe the reduction in per-unit fixed costs as volume increases because fixed costs are spread over more units.
When performing a make-or-buy analysis, which factor would MOST favor the 'buy' decision?
Answer: The supplier has proprietary technology the firm cannot easily replicate
When a supplier possesses proprietary technology the buyer cannot replicate cost-effectively, outsourcing leverages that expertise and supports a 'buy' decision.