Product Management Product Management: Cost Estimation 3 — Questions and Answers
Question 1: A startup PM must choose between two features. Feature A costs $50K with a 60% chance of $200K return. Feature B costs $30K with an 80% chance of $100K return. Which has a higher Expected Monetary Value (EMV)?
- Feature A ($70K EMV) (Correct answer)
- Feature B ($50K EMV)
- Feature A ($120K EMV)
- Feature B ($80K EMV)
Correct answer: Feature A ($70K EMV)
EMV = (probability × return) − cost; Feature A: (0.6 × $200K) − $50K = $70K; Feature B: (0.8 × $100K) − $30K = $50K.
Question 2: In software product development, which factor most commonly causes cost estimates to grow over time?
- Vendor price increases
- Scope creep adding unplanned features and requirements (Correct answer)
- Underestimating marketing costs
- Changes in development language or framework
Correct answer: Scope creep adding unplanned features and requirements
Scope creep — the gradual addition of unplanned features — is the most common driver of cost growth in software product development.
Question 3: What is the primary purpose of a Work Breakdown Structure (WBS) in cost estimation?
- To assign team members to tasks
- To decompose project deliverables into manageable components for more accurate costing (Correct answer)
- To create a timeline for project milestones
- To document project risks and mitigation strategies
Correct answer: To decompose project deliverables into manageable components for more accurate costing
A WBS decomposes deliverables into smaller, more manageable work packages, enabling more accurate and detailed cost estimates for each component.
Question 4: A PM is using Agile and wants to estimate the cost of a sprint. The team's velocity is 40 story points per sprint, and each story point costs $500. What is the estimated sprint cost?
- $10,000
- $20,000 (Correct answer)
- $40,000
- $500
Correct answer: $20,000
Sprint cost = velocity × cost per point = 40 × $500 = $20,000.
Question 5: Which statement best describes the difference between direct costs and indirect costs in product development?
- Direct costs are fixed; indirect costs are variable
- Direct costs are traced specifically to a product; indirect costs are shared overhead allocated across products (Correct answer)
- Direct costs occur during development; indirect costs occur post-launch
- Direct costs are budgeted; indirect costs are unplanned
Correct answer: Direct costs are traced specifically to a product; indirect costs are shared overhead allocated across products
Direct costs (e.g., developer salaries for a specific feature) are directly attributable to a product, while indirect costs (e.g., office rent) are shared overhead.
Question 6: A product manager discovers the actual cost to develop a feature was $80K, but the approved budget was $60K. What is the cost variance (CV)?
- +$20K (over budget)
- -$20K (over budget) (Correct answer)
- +$20K (under budget)
- $0 (on budget)
Correct answer: -$20K (over budget)
CV = EV − AC; if earned value equals planned value of $60K and actual cost is $80K, CV = $60K − $80K = −$20K, indicating an overrun.
Question 7: When should a ROM (Rough Order of Magnitude) estimate typically be used?
- During final contract negotiations with vendors
- In the early project initiation phase when details are unknown (Correct answer)
- When providing a firm fixed-price bid to a client
- After completing the detailed design phase
Correct answer: In the early project initiation phase when details are unknown
ROM estimates (with −25% to +75% accuracy) are used in early project phases when little detail is known, to help with initial go/no-go decisions.
Product Management Product Management: Cost Estimation 3
A startup PM must choose between two features.
Feature A costs $50K with a 60% chance of $200K return.
Feature B costs $30K with an 80% chance of $100K return.
Which has a higher Expected Monetary Value (EMV)?