CPP Cost Analysis & Total Cost of Ownership 2 — Questions and Answers
Question 1: Which cost element is most commonly overlooked when calculating Total Cost of Ownership (TCO) for capital equipment?
- Purchase price
- End-of-life disposal and decommissioning costs (Correct answer)
- Installation costs
- Shipping and freight charges
Correct 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.
Question 2: 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?
- 500 units
- 1,000 units (Correct answer)
- 2,500 units
- 5,000 units
Correct 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.
Question 3: In cost analysis, the term 'should-cost' model refers to:
- The historical average cost paid by the buyer
- A buyer's independent estimate of what a product or service ought to cost based on its components (Correct answer)
- The supplier's target profit margin
- The industry benchmark price published by trade associations
Correct 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.
Question 4: Which of the following best describes 'price analysis' as opposed to 'cost analysis'?
- Price analysis examines internal supplier cost structures; cost analysis uses market data
- Price analysis compares the offered price to market benchmarks without examining underlying costs; cost analysis examines cost elements (Correct answer)
- Price analysis is used only for services; cost analysis is used only for goods
- Price analysis requires supplier cost breakdowns; cost analysis does not
Correct 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.
Question 5: A buyer is evaluating a 5-year software contract. Which TCO component would NOT typically be included?
- Implementation and integration costs
- Annual license fees
- User training and change management
- The vendor's R&D investment in developing the software (Correct answer)
Correct 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.
Question 6: Fixed costs per unit decrease as production volume increases. This phenomenon is known as:
- Economies of scale (Correct answer)
- Learning curve effect
- Price elasticity
- Variable cost leverage
Correct 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.
Question 7: When performing a make-or-buy analysis, which factor would MOST favor the 'buy' decision?
- The item is a core competency of the firm
- The supplier has proprietary technology the firm cannot easily replicate (Correct answer)
- The firm has excess production capacity
- Long-term supply security is critical to the firm's strategy
Correct 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.
CPP Cost Analysis & Total Cost of Ownership 2
Which cost element is most commonly overlooked when calculating Total Cost of Ownership (TCO) for capital equipment?