CPP Cost Analysis & Total Cost of Ownership 3 — Questions and Answers
Question 1: The learning curve theory suggests that as cumulative production doubles, unit labor costs decrease by a fixed percentage. If a 90% learning curve applies, and the first unit costs $1,000, the second unit should cost approximately:
- $810
- $900 (Correct answer)
- $950
- $980
Correct answer: $900
A 90% learning curve means the second cumulative unit costs 90% of the first unit's cost: $1,000 × 0.90 = $900.
Question 2: Which of the following is a 'transaction cost' that should be included in TCO calculations?
- Raw material costs
- Order processing, invoicing, and payment administration costs (Correct answer)
- The supplier's factory overhead
- Product design costs
Correct answer: Order processing, invoicing, and payment administration costs
Transaction costs like order processing, invoicing, and payment administration are internal buyer costs associated with conducting business with a supplier.
Question 3: A cost structure where 70% of costs are fixed and 30% are variable is said to have high:
- Price elasticity
- Operating leverage (Correct answer)
- Cost flexibility
- Marginal utility
Correct answer: Operating leverage
High operating leverage means a large proportion of costs are fixed, so small changes in volume cause large swings in profit.
Question 4: In supplier cost breakdowns, 'burden rate' or 'overhead rate' typically includes:
- Direct material costs only
- Direct labor costs only
- Indirect costs such as factory rent, utilities, and supervision allocated to products (Correct answer)
- The supplier's net profit margin
Correct answer: Indirect costs such as factory rent, utilities, and supervision allocated to products
Burden or overhead rates allocate indirect manufacturing costs (rent, utilities, supervision) to products based on a driver like direct labor hours.
Question 5: A buyer uses weighted-criteria evaluation to select a supplier. Price receives a weight of 40%, quality 35%, and delivery 25%. Supplier A scores 80/70/90 and Supplier B scores 70/90/80. Which supplier wins?
- Supplier A with a weighted score of 79 (Correct answer)
- Supplier B with a weighted score of 81
- Supplier A with a weighted score of 80
- Supplier B with a weighted score of 79.5
Correct answer: Supplier A with a weighted score of 79
Supplier A: (80×0.4)+(70×0.35)+(90×0.25) = 32+24.5+22.5 = 79; Supplier B: (70×0.4)+(90×0.35)+(80×0.25) = 28+31.5+20 = 79.5 — Supplier B actually wins at 79.5.
Question 6: Which pricing model most effectively aligns supplier incentives with buyer cost reduction goals?
- Fixed-price contracts
- Cost-plus-percentage-of-cost contracts
- Incentive contracts with shared savings (Correct answer)
- Time-and-materials contracts
Correct answer: Incentive contracts with shared savings
Incentive contracts with shared savings reward the supplier for reducing costs, aligning their financial interest with the buyer's goal of lower total cost.
Question 7: A product's Bill of Materials (BOM) is primarily used in cost analysis to:
- Determine the supplier's profit margin
- Identify all component materials and their quantities to estimate direct material costs (Correct answer)
- Calculate transportation and logistics costs
- Assess supplier financial stability
Correct answer: Identify all component materials and their quantities to estimate direct material costs
A BOM lists every component and quantity needed to produce a product, enabling buyers to independently estimate direct material costs for should-cost modeling.
CPP Cost Analysis & Total Cost of Ownership 3
The learning curve theory suggests that as cumulative production doubles, unit labor costs decrease by a fixed percentage.
If a 90% learning curve applies, and the first unit costs $1,000, the second unit should cost approximately: