Cost Analysis & Total Cost of Ownership Flashcards
7 cards from real CPP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Cost Analysis & Total Cost of Ownership flashcards as text
Which of the following best describes 'price elasticity of demand' and its relevance to purchasing?
Answer: It measures how quantity demanded changes in response to price changes, affecting negotiation leverage
Price elasticity measures demand sensitivity to price changes; buyers with inelastic demand have less negotiation leverage because they must purchase regardless of price.
When analyzing supplier cost proposals, 'general and administrative (G&A) expenses' typically cover:
Answer: Corporate overhead costs like executive salaries, legal, and accounting not tied to specific contracts
G&A expenses are corporate-level overhead costs spread across all business units, including executive salaries, legal fees, and accounting.
A buyer is evaluating switching suppliers. The new supplier offers a 10% lower unit price, but switching costs include $20,000 in qualification testing and $15,000 in tooling. Annual spend is $100,000. How many years to break even?
Answer: 3.5 years
Annual savings = $100,000 × 10% = $10,000; total switching cost = $35,000; break-even = $35,000 ÷ $10,000 = 3.5 years.
The concept of 'value engineering' in procurement aims to:
Answer: Reduce cost by examining product functions and finding less expensive ways to achieve the same function
Value engineering systematically analyzes product functions to eliminate unnecessary costs while maintaining required performance and quality.
In a cost model, 'direct costs' are best defined as:
Answer: Costs that can be traced directly and economically to a specific product or service
Direct costs are those that can be specifically and economically traced to a cost object, such as direct materials and direct labor for a specific product.
A buyer uses 'target costing' as a strategic approach. This means:
Answer: The buyer starts with the market price and works backward to set the allowable cost for the product
Target costing begins with the desired selling price, subtracts the required profit margin, and the result is the maximum allowable cost for the product.
Which of the following is an example of a 'quality cost' that should be included in TCO analysis?
Answer: Buyer's internal scrap, rework, and warranty claims caused by defective purchased parts
Internal failure costs such as scrap, rework, and warranty claims resulting from supplier defects are quality costs that increase TCO beyond the purchase price.