CPSM Financial Analysis & Cost Management in Supply Management — Questions and Answers
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?
- Inventory carrying costs associated with Supplier A's minimum order requirement (Correct answer)
- The color of the packaging used by each supplier
- The distance between each supplier's headquarters and the buyer's main office
- The number of years each supplier has been in business
Correct answer: Inventory carrying costs associated with Supplier A's minimum order requirement
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?
- Market price analysis
- Cost analysis (Correct answer)
- Price index benchmarking
- Competitive bidding
Correct answer: Cost analysis
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?
- Whether the component is aesthetically similar to competitor products
- The opportunity cost of capital and management attention devoted to in-house production (Correct answer)
- The marketing strategy for the finished product
- The number of patents held by external suppliers
Correct answer: The opportunity cost of capital and management attention devoted to in-house production
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:
- The supplier is likely to default on its debt in the short term
- The supplier has strong short-term liquidity to meet near-term obligations (Correct answer)
- The supplier is overpriced relative to competitors
- The supplier carries excessive long-term debt
Correct answer: The supplier has strong short-term liquidity to meet near-term obligations
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:
- Allow the buyer to reduce price unilaterally if the market falls
- Automatically adjust the contract price based on changes in agreed-upon cost indices (Correct answer)
- Eliminate the need for competitive bidding on renewals
- Cap the supplier's profit margin throughout the contract term
Correct answer: Automatically adjust the contract price based on changes in agreed-upon cost indices
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.
Question 6: Target costing is a supply management technique in which:
- The supplier sets its price based on actual production costs plus a fixed markup
- The buyer determines an allowable cost by subtracting a desired profit margin from the expected market price, then works with suppliers to achieve that cost (Correct answer)
- Competitive bids are averaged to establish a market price target
- The government mandates cost ceilings for regulated commodities
Correct answer: The buyer determines an allowable cost by subtracting a desired profit margin from the expected market price, then works with suppliers to achieve that cost
Target costing starts with the market price and desired margin, derives an allowable cost, and then challenges the supply chain — including suppliers — to meet that cost through design, process, or specification changes. It is market-driven, not cost-driven.
CPSM Financial Analysis & Cost Management in Supply Management
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?