CPP Cost Reduction & Value Analysis Strategies 2 — Questions and Answers
Question 1: In value engineering (VE), which activity is performed FIRST in the job plan sequence?
- Function phase
- Information phase (Correct answer)
- Creative phase
- Evaluation phase
Correct answer: Information phase
The information phase is the first step, where data about the item's cost, function, and requirements is gathered.
Question 2: A purchasing professional uses 'should-cost' modeling primarily to:
- Determine the supplier's profit margin
- Establish a defensible price target before negotiations (Correct answer)
- Calculate total cost of ownership
- Assess supplier financial health
Correct answer: Establish a defensible price target before negotiations
Should-cost models estimate what a product or service ought to cost based on materials, labor, overhead, and profit, creating a negotiating baseline.
Question 3: Which cost reduction technique involves redesigning a product so that fewer components are needed to achieve the same function?
- Standardization
- Design for manufacturability
- Parts consolidation (Correct answer)
- Make-or-buy analysis
Correct answer: Parts consolidation
Parts consolidation reduces the total number of components, lowering assembly time, inventory, and procurement costs while maintaining function.
Question 4: Target costing is BEST described as:
- Setting cost targets based on competitor benchmarking alone
- Subtracting desired profit from market price to determine allowable cost (Correct answer)
- Identifying costs after product design is finalized
- Using historical spend data to project future costs
Correct answer: Subtracting desired profit from market price to determine allowable cost
Target costing works backward from a competitive market price minus a required profit margin to establish the maximum allowable product cost.
Question 5: Early supplier involvement (ESI) in product development primarily contributes to cost reduction by:
- Eliminating the need for competitive bidding
- Allowing suppliers to influence design for lower-cost manufacturability (Correct answer)
- Shifting financial risk to the supplier
- Reducing lead times after product launch
Correct answer: Allowing suppliers to influence design for lower-cost manufacturability
ESI lets suppliers contribute manufacturing knowledge during design, preventing costly re-engineering and selecting cost-effective materials upfront.
Question 6: When analyzing a supplier's cost breakdown, the term 'conversion cost' refers to:
- The cost of raw materials used in production
- Labor and overhead costs required to transform materials into finished goods (Correct answer)
- Transportation and logistics costs
- Warranty and after-sales service costs
Correct answer: Labor and overhead costs required to transform materials into finished goods
Conversion costs encompass direct labor and manufacturing overhead incurred to convert raw materials into finished products.
Question 7: A company negotiates a multi-year blanket purchase order with a single supplier to achieve lower unit prices. This is an example of:
- Supply base rationalization
- Volume leveraging (Correct answer)
- Spend consolidation
- Value engineering
Correct answer: Volume leveraging
Volume leveraging uses committed purchase volumes as a bargaining tool to obtain price reductions from suppliers.
CPP Cost Reduction & Value Analysis Strategies 2
In value engineering (VE), which activity is performed FIRST in the job plan sequence?