Product Management Product Management: Cost Estimation 4 — Questions and Answers
Question 1: A product team is evaluating whether to build or buy a component. The build option costs $120K upfront with $5K/year maintenance. The buy option costs $20K/year. At what year does the build option break even?
- Year 8
- Year 10
- Year 12 (Correct answer)
- Year 6
Correct answer: Year 12
Break-even: $120K + $5K×Y = $20K×Y → $120K = $15K×Y → Y = 8 years, so break-even is in Year 8.
Question 2: What does 'gold plating' mean in product cost management, and why is it a problem?
- Using premium pricing strategy to position a product as luxury
- Adding features beyond the agreed scope, wasting budget without adding approved value (Correct answer)
- Applying expensive technologies unnecessarily to impress stakeholders
- Allocating extra budget to high-risk product lines
Correct answer: Adding features beyond the agreed scope, wasting budget without adding approved value
Gold plating means adding unapproved features or extras, which consumes budget and schedule without delivering the value stakeholders actually approved.
Question 3: In Agile product management, how is cost estimation typically handled compared to traditional waterfall?
- Agile uses more detailed upfront estimates with fixed scope
- Agile uses relative sizing (story points) and revisits estimates each sprint with adaptive planning (Correct answer)
- Agile eliminates cost estimation entirely in favor of continuous delivery
- Agile locks in costs at the beginning of each quarter with no changes allowed
Correct answer: Agile uses relative sizing (story points) and revisits estimates each sprint with adaptive planning
Agile uses relative estimation techniques like story points and continuously refines cost expectations through iterative sprint planning and velocity tracking.
Question 4: What is Estimate at Completion (EAC) when using the formula EAC = BAC / CPI?
- The budget needed to complete only remaining work
- The forecasted total project cost based on current cost performance (Correct answer)
- The original approved project budget
- The planned value of work completed so far
Correct answer: The forecasted total project cost based on current cost performance
EAC = BAC / CPI forecasts the total cost to complete the project assuming current cost efficiency continues throughout the remaining work.
Question 5: A PM is presenting costs to non-technical stakeholders. Which visualization is most effective for showing how total product cost breaks down by category?
- Gantt chart
- Burn-down chart
- Pie chart or stacked bar chart showing cost breakdown structure (Correct answer)
- Scatter plot of story points vs. sprint costs
Correct answer: Pie chart or stacked bar chart showing cost breakdown structure
A pie chart or stacked bar chart clearly communicates proportional cost distribution across categories to non-technical audiences.
Question 6: Which risk response strategy directly increases a project's cost estimate by adding contingency?
- Risk avoidance
- Risk acceptance with active contingency planning (Correct answer)
- Risk transfer via insurance
- Risk exploitation
Correct answer: Risk acceptance with active contingency planning
Active risk acceptance acknowledges the risk and sets aside contingency reserves, which directly increases the cost estimate to buffer against potential overruns.
Question 7: A product manager receives vendor quotes for a new integration. One quote is $45K fixed-price and another is $30K time-and-materials. Which contract type exposes the buyer to more cost risk?
- Fixed-price contract
- Time-and-materials contract (Correct answer)
- Both carry identical risk
- Risk depends solely on vendor reputation
Correct answer: Time-and-materials contract
Time-and-materials contracts expose the buyer to higher cost risk because the final price depends on actual hours and materials used, with no ceiling unless specified.
Product Management Product Management: Cost Estimation 4
A product team is evaluating whether to build or buy a component.
The build option costs $120K upfront with $5K/year maintenance.
The buy option costs $20K/year.
At what year does the build option break even?