CPSM Financial Analysis & Cost Management in Supply Management

Question 1

A supply manager is evaluating two suppliers for a component. Supplier A charges $12 per unit but requires a minimum order of 5,000 units. Supplier B charges $14 per unit with no minimum. When calculating Total Cost of Ownership (TCO), which additional factor should be weighted MOST heavily?

Accepted Answer

Inventory carrying costs associated with Supplier A's minimum order requirement

Answer

TCO extends beyond unit price to include all costs of ownership. A 5,000-unit minimum forces higher inventory levels, increasing carrying costs (typically 20–30% of inventory value annually) that may eliminate Supplier A's per-unit price advantage.

Question 2

Which analytical technique separates a supplier's quoted price into its underlying cost elements (materials, labor, overhead, profit) to assess whether the price is reasonable?

Accepted Answer

Cost analysis

Answer

Cost analysis breaks a supplier's price into constituent elements to verify reasonableness when adequate price competition is absent or when the buyer has sufficient data to challenge cost claims. Market price analysis uses external market data without decomposing cost structure.

Question 3

A make-vs-buy analysis concludes that producing a component in-house costs $8 per unit versus $10 from an external supplier. However, the analysis should also consider which of the following before finalizing the decision?

Accepted Answer

The opportunity cost of capital and management attention devoted to in-house production

Answer

A make-vs-buy analysis must include opportunity costs — resources (capital, floor space, management bandwidth) consumed by in-house production could generate value elsewhere. Ignoring opportunity cost can make 'making' appear cheaper than it truly is.

Question 4

When a supply manager reviews a supplier's financial statements to assess viability, a HIGH current ratio (current assets ÷ current liabilities) primarily indicates:

Accepted Answer

The supplier has strong short-term liquidity to meet near-term obligations

Answer

The current ratio measures short-term liquidity. A ratio above 1.0 means current assets exceed current liabilities, signaling the supplier can cover near-term obligations — a positive supplier stability indicator. It does not directly speak to long-term debt or pricing.

Question 5

Price escalation clauses in long-term supply contracts are PRIMARILY used to:

Accepted Answer

Automatically adjust the contract price based on changes in agreed-upon cost indices

Answer

Escalation clauses tie price adjustments to objective indices (e.g., PPI, commodity price indexes), allocating cost volatility risk fairly between buyer and supplier over multi-year contracts. They protect both parties from price uncertainty without requiring full renegotiation.

(CPSM) Certified Professional in Supply Management Practice Test

(CPSM) Certified Professional in Supply Management Practice Test

CPSM Financial Analysis & Cost Management in Supply Management