Test Bank for Managing Supply Chain and Operations

An Integrative Approach 1st Edition Foster Sampson

Wallin Webb 0132832402 9780132832403

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Managing Supply Chain and Operations, (Foster et al.)

Chapter 6 Strategic Sourcing

Learning Objective 6-1

1) The terms procurement and purchasing are used interchangeably.

Answer: TRUE
Difficulty: Easy
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

2) The focus of the purchasing function in the new millennium (year 2000 onwards) has been
solely on reducing prices.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

3) The focus of the purchasing function in the war years (1910-1946) was on obtaining scarce
materials.
Answer: TRUE
Difficulty: Moderate
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

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4) The process of buying and working with suppliers is known as
A) procurement.
B) purchasing.
C) sourcing.
D) supply management.
E) all of the above.
Answer: E
Difficulty: Easy
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

5) The focus of the purchasing function in the new millennium (year 2000 onwards) has been
A) developing basic purchasing procedures.
B) obtaining scarce materials.
C) solely on reducing prices.
D) developing collaborative relationships with suppliers.
Answer: D
Difficulty: Moderate
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

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6) The focus of the purchasing function in the war years (1910-1946) was
A) developing basic purchasing procedures.
B) obtaining scarce materials.
C) solely on reducing prices.
D) developing collaborative relationships with suppliers.
Answer: B
Difficulty: Moderate
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

7) The process of planning, evaluating, implementing, and controlling sourcing decisions is

known as ________.
Answer: strategic sourcing
Difficulty: Easy
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

8) Purchasing is the process of ________.

Answer: buying and working with suppliers
Difficulty: Moderate
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Application of Knowledge

9) What has been the focus of the purchasing function in the new millennium (year 2000
onwards) and what is its impact on the firm?
Answer: Most firms now look to their procurement functions to provide a competitive advantage
by driving cost savings for the firm and providing an uninterrupted supply of the needed
products and services at the right quality by selecting and developing the right suppliers. The
focus is on a more collaborative approach with key suppliers to develop an integrated supply
chain.
Page Ref: 148
Difficulty: Moderate
Learning Obj.: LO 6.1: Understand the Origins of the Purchasing Profession
AACSB: Reflective Thinking

Learning Objective 6-2

1) Purchased goods and services typically make up under 50% of a firm's cost of goods sold.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Application of Knowledge

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2) A dollar saved in cost of materials purchased is a dollar added to the pre-tax profit.
Answer: TRUE
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Reflective Thinking

3) The impact of sourcing materials or services with improved quality is usually reduced
profitability for the firm.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Reflective Thinking

4) Only 25 percent of an item or service's cost is determined in the design stage.

Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Application of Knowledge

5) Purchased goods and services typically make up what percentage of a firm's cost of goods
sold?
A) 0 to 10
B) 10 to 50
C) 50 to 90
D) Above 90
Answer: C
Difficulty: Easy
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Application of Knowledge

Use the following information to answer the following question(s).

ABC Tools has annual sales of $50 million, annual materials cost of $28 million, and net income
of $5 million.

6) If a new purchasing agent is able to reduce the cost of materials by 10 percent, what would be
the addition to the bottom line?
A) $5 million
B) $2.8 million
C) $10 million
D) $15 million
Answer: B
Difficulty: Easy
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Analytical Thinking

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7) What is the new profit margin with a 10-percent reduction in the cost of materials, assuming
sales remain the same?
A) 10%
B) 13.5%
C) 15.6%
D) 20%
Answer: C
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Analytical Thinking

8) What is the required increase in sales to have the same effect on the bottom line as a 10-
percent reduction in the cost of materials?
A) 25%
B) 50%
C) 56%
D) 100%
Answer: C
Difficulty: Challenging
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Analytical Thinking

9) The impact of sourcing materials or services with improved quality for a firm is
A) possible higher product selling prices.
B) higher perceived value.
C) increased market share.
D) higher profitability.
E) all of the above.
Answer: E
Difficulty: Easy
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Reflective Thinking

10) The impact of sourcing materials or services with improved quality for a firm is
A) lower profitability.
B) higher perceived value.
C) increased market share.
D) all of the above.
E) only B and C above.
Answer: E
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Reflective Thinking

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Use the information below to answer the following question(s):

A retailer operating a network of home improvement stores has annual sales of $800 million,
annual cost of goods and materials purchased of $500 million, and net income of $125 million.

11) If a newly implemented strategic sourcing process is able to reduce the cost of goods and
materials purchased by 15 percent, what would be the new net profit, given that annual sales and
other costs remain unchanged?
A) $150 million
B) $175 million
C) $200 million
D) $250 million
Answer: C
Difficulty: Easy
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Analytical Thinking

12) What is the new profit margin with a 15-percent reduction in the cost of goods and materials
purchased, assuming sales and other costs remain unchanged?
A) 10%
B) 15%
C) 20%
D) 25%
Answer: D
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Analytical Thinking

13) What should the new annual sales be to have the same effect on the bottom line as a 15-
percent reduction in the cost of goods and materials purchased, other things remaining
unchanged?
A) $500 million
B) $800.75 million
C) $1.280 billion
D) $1.5 billion
Answer: C
Difficulty: Challenging
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Analytical Thinking

14) Purchased goods and services typically make up ________% of a firm's cost of goods sold.
Answer: 50 to 90
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Application of Knowledge

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15) Approximately ________ percent of an item or service's cost is determined in the design
stage.
Answer: 85
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Application of Knowledge

16) What is the strategic impact of the quality of purchased goods and services for a firm?
Answer: A procurement organization with strategic sourcing in mind is also focused on the
quality of goods and services. Experienced purchasing managers understand that overall product
quality is no better than the weakest supplier. Sourcing materials and services with higher levels
of quality can also affect profitability. Improving the quality of materials used in the product may
allow the manufacturer to increase the price charged for the product, thereby increasing revenues
at the same level of sales. Or, if the new and improved component is an important feature of the
product, that component alone may drive up sales, and the manufacturer will be able to increase
its market share. The manufacturer may also see an effect on profitability from improved quality
conformance when defect rates drop and there is less waste due to faulty parts.
Supply managers must be aware that the reverse is also true, however. If materials or services
with poor quality conformance are sourced, there are potential negative effects on prices, market
share, revenues, production costs, and profitability.
Page Ref: 151
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Reflective Thinking

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17) What is the role of supply management on the product development and design process?
Answer: Approximately 85 percent of an item or service's cost is determined in the design
stage.This combined with the fact that purchased goods and services make up more than 50
percent of a firm's cost of goods sold means that supply managers need to maximize the effect he
or she can have on the cost and quality of the materials and service procured, and thus the
manager must be involved in the design and development process.
Before supply managers can add value to the development and design process, however, they
must be aware of what the supply base is capable of providing. As supply managers become
familiar with the supply base and take time to investigate ongoing innovations, they may find
applicable capabilities beyond their expectations.
Armed with knowledge of supplier capabilities, supply managers who are involved in new
product design can contribute in many ways. They can suggest component parts that are already
used in another product within the firm, or they can find a lower-cost or higher quality
component during the design stage. Supply managers can also facilitate early supplier
involvement in the design process, which has been found to help reduce cost, reduce concept-to-
customer development time, improve quality, and provide innovative technologies that can help
capture market share. Although there are many possible supplier integration points in the new
product development process, world-class companies are maximizing the benefits of early
supplier involvement by forming cross-functional design teams and involving suppliers at the
earliest stages of development.
Page Ref: 151-152
Difficulty: Moderate
Learning Obj.: LO 6.2: Describe the Impact of Strategic Sourcing on a Firm
AACSB: Reflective Thinking

Learning Objective 6-3

1) The main objective of the portfolio model is to determine cost discount targets for different
suppliers.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

2) In the strategic sourcing framework, the margin on a particular item for a supplier is known as
the profit impact.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

3) In the portfolio model, depending on the sourcing strategy, an item is assigned to a particular
quadrant.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge
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4) An auto manufacturer using the portfolio model for strategic sourcing would classify items
like office supplies into the leverage items quadrant.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Reflective Thinking

5) For a manufacturer of canned fruit, the procurement of items like oranges and peaches will
fall in the leverage quadrant.
Answer: TRUE
Difficulty: Easy
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Reflective Thinking

6) For a national pizza restaurant chain, the procurement of cheese will fall in the routine
quadrant.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Reflective Thinking

7) For a computer manufacturer, items like the processor, which has only a few qualified
suppliers, will be classified in the bottleneck quadrant.
Answer: FALSE
Difficulty: Challenging
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Reflective Thinking

8) A sourcing strategy for items in the bottleneck quadrant will be to develop new suppliers.
Answer: TRUE
Difficulty: Easy
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Reflective Thinking

9) A sourcing strategy for items in the bottleneck quadrant will be to narrow the specifications to
allow for more product options.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

10) A sourcing strategy for items in the leverage quadrant will be to build long-term alliances
with a few suppliers.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge
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11) A sourcing strategy for items in the critical quadrant will be to prepare contingency plans to
protect against unforeseen risks.
Answer: TRUE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

12) A sourcing strategy for items in the routine quadrant will be to simplify the acquisition
process.
Answer: TRUE
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

13) With reference to strategic sourcing, the portfolio model is

A) the result of the sheer volume of spend for a particular item.
B) used to determine cost discounts targets for different suppliers.
C) a framework for making purchasing-related decisions.
D) used to make investment decisions in supplier assets.
Answer: C
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

14) With reference to the strategic sourcing framework, profit impact is

A) the result of the sheer volume of spend for a particular item.
B) used to determine cost discounts targets for different suppliers.
C) a framework for making purchasing-related decisions.
D) used to make investment decisions in supplier assets.
Answer: A
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

15) With of the following factors determine supply risk for an item?
A) Lack of qualified sources
B) Raw material scarcity
C) Lack of substitutes
D) All of the above
E) Only A and C above
Answer: D
Difficulty: Easy
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

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16) A sourcing strategy for items in the bottleneck quadrant will be to
A) narrow the specifications to allow for more product options.
B) increase competition by encouraging other supplier to offer the item.
C) develop new suppliers.
D) all of the above.
E) only B and C above.
Answer: E
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

17) A company using portfolio analysis decides to simplify the acquisition process by
negotiating an ongoing contract. The quadrant that these items fall in is most probably the
A) routine quadrant.
B) leverage quadrant.
C) bottleneck quadrant.
D) critical quadrant.
Answer: A
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

18) A purchased good that can have a big effect on profitability but only has a few qualified
suppliers is a
A) routine item.
B) leverage item.
C) bottleneck item.
D) critical item.
Answer: D
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

19) A purchased item with few alternate sources of supply typically due to complex
specifications is a
A) routine item.
B) leverage item.
C) bottleneck item.
D) critical item.
Answer: C
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

11
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20) A purchased item (though it may have many suppliers) that still has the potential to affect
profit because it is associated with high levels of expenditure is a
A) routine item.
B) leverage item.
C) bottleneck item.
D) critical item.
Answer: B
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

21) The sourcing strategy for procuring leverage items would be to

A) use reverse auctions.
B) decentralize purchasing.
C) narrow item specifications.
D) develop long-term partnerships with one or two key suppliers.
Answer: A
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

22) The sourcing strategy for items in the critical quadrant would be to
A) use reverse auctions.
B) decentralize purchasing.
C) narrow item specifications.
D) develop long-term partnerships with one or two key suppliers.
Answer: D
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

23) The sourcing strategy for procuring routine items would be to

A) use reverse auctions.
B) decentralize purchasing.
C) narrow item specifications.
D) develop long-term partnerships with one or two key suppliers.
Answer: B
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

24) The sheer volume of spend for a particular item is known as the ________.
Answer: profit impact
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

12
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25) A framework for making purchasing-related strategic management decisions is known as the
________.
Answer: portfolio model
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

26) The extent to which an item is difficult to source due to a lack of qualified sources or lack of
substitutes among others is known as ________.
Answer: supply risk
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

27) A company using portfolio model for strategic sourcing decisions decides to form long-term
alliances with their key suppliers; the products in question most likely fall in the ________
quadrant.
Answer: critical
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

28) A company using a portfolio model for strategic sourcing decisions decides to simplify the
acquisition process by decentralizing the procurement activities; the products in question most
likely fall in the ________ quadrant.
Answer: routine
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

29) A purchased item that has many sources of supply, but has the potential to affect profit
because it is bought in high volumes is a(n) ________ item.
Answer: leverage
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

30) A basic item like office supplies is a(n) ________ item.

Answer: routine
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

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31) A purchased item with few alternate sources of supply due to complex manufacturing
process is typically a(n) ________ item.
Answer: bottleneck
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

32) A purchased good that can have a big effect on profitability but only has a few qualified
suppliers is a(n) ________ item.
Answer: critical
Difficulty: Moderate
Learning Obj.: LO 6.3: Apply the Portfolio Approach to Strategic Sourcing
AACSB: Application of Knowledge

Learning Objective 6-4

1) The spend on any item that supports the operation of the firm is categorized within the direct
spend category.
Answer: FALSE
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

2) The spend on building and large equipment is categorized within the capital spend category.
Answer: TRUE
Difficulty: Easy
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

3) The spend on an item like spare parts for the factory equipment should be categorized in
which spend category?
A) Indirect
B) Direct
C) Capital
D) Process
Answer: A
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Reflective Thinking

14
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4) The spend on an item like steel by an automobile manufacturer should be categorized in which
spend category?
A) Indirect
B) Direct
C) Capital
D) Process
Answer: B
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Reflective Thinking

5) The purchasing team examined all of the past purchases from the previous financial year in
order to identify possible areas of cost savings. What kind of analysis was the purchasing team
conducting?
A) Process analysis
B) Purchasing analysis
C) Spend analysis
D) Pattern analysis
Answer: C
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Reflective Thinking

6) The process of comparing supplier prices against one another or against external benchmarks
is known as
A) price analysis.
B) cost analysis.
C) benchmark analysis.
D) external analysis.
Answer: A
Difficulty: Easy
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

7) The sum of acquisition, ownership, and post ownership costs is known as

A) total acquisition costs.
B) total cost of ownership.
C) should cost modeling.
D) post ownership costs.
Answer: B
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

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8) The fee levied on a consumer for the disposal of a computer after its end-of-life use is a
A) total acquisition cost.
B) total cost of ownership.
C) should cost modeling.
D) post ownership cost.
Answer: D
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Reflective Thinking

9) A review of a firm's entire set of purchases to find what the firm is spending its money on is
called ________.
Answer: spend analysis
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

10) The spend on any item that is part of the final product is categorized within the ________
category.
Answer: direct spend
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

11) The spend on any item that supports the operation of the firm is categorized within the
________ category.
Answer: indirect spend
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

12) The spend on an item like spare parts for the factory equipment should be categorized within
the ________ category.
Answer: indirect spend
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Reflective Thinking

13) The spend on building and large equipment is categorized within the ________ category.
Answer: capital spend
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

16
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14) The process of comparing supplier prices against one another or against external benchmarks
is known as ________.
Answer: price analysis
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

15) The process of determining what a product should cost based on its component raw material,
manufacturing and overhead costs is known as ________.
Answer: should cost modeling
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

16) The sum of acquisition, ownership, and post ownership costs is known as ________.
Answer: total cost of ownership (TCO)
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

17) A pricing method that includes maintenance and operation of products is known as
________.
Answer: ownership costs
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

18) All costs related to the customer's use and disposition of a purchased item are known as
________.
Answer: post ownership costs
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Application of Knowledge

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19) Two suppliers have quoted the following pricing and payment terms for the procurement of a
certain part:
Supplier A $121.25/unit, payment due in 45 days
Supplier B $120.00/unit, payment due on delivery

Perform a price analysis with a 10% annual cost of capital.

Answer: To equitably compare these two prices, we need to adjust for the different payment
windows. We do so by adding an opportunity cost to the supplier that requires earlier payment to
account for the interest that we would have been able to make on that money had we been able to
keep it in our accounts for the longer payment window. To make the adjustment, we need to
determine the following:
1. Number of days earlier supplier B must be paid (longest days to pay - shortest days to pay)
45 days - 0 days = 45 days
2. Your organization's daily cost of capital
If we assume an annual cost of capital of 10 percent, the daily cost of capital would be 0.010/365
= 0.000274
3. Opportunity cost = number of days earlier * daily cost of capital * purchase price
45 * 0.000274 * $120.00 = $1.479
4. The effective price for supplier B: $120.00 + $1.479 = $121.479
As a result of the price analysis, we conclude that although supplier A offers the item at a higher
price, the effective price for supplier B was actually higher than supplier A because of the
different payment window. The key to price analysis is ensuring that the prices are compared on
an equivalent basis.
Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Analytical Thinking

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20) The ABC Tool company is considering the best manufacturing location decision for
manufacturing their range of PowerDrills. The 3 options are to manufacture in the USA (current
scenario), outsource manufacturing to either China or India. The cost to manufacture the product
in the USA location (including all overhead costs) is $50 per unit, whereas the same cost for the
China and India locations are $33 per unit and $30 per unit respectively. A container can hold
1000 units and it costs $10,000 to ship a container from China to USA and $11,200 to ship a
container from India to USA. Additional inventory carrying costs incurred on account of the
China and India locations are $1 and $1.35 per unit respectively. Additional logistics costs (on
account of customs duties and related delays) are $2 and $2.5 for the China and India locations
respectively. Determine the best (lowest cost) location to manufacture the PowerDrill product
line.
Answer: The table below gives the unit cost calculations. At can be seen, the best (lowest) cost
location to manufacture the product is India based on the total cost of ownership calculations.

Cost per unit

($) USA China India
Manufacturing
Cost 50 33 30
Shipping cost
per unit 0 10 11.2
Inventory
carrying cost 0 1.0 1.35
Additional
logistics cost 0 2.0 2.5
Estimated
total cost per
unit 50 46 45.05

Difficulty: Moderate
Learning Obj.: LO 6.4: Master the Tools of Strategic Cost Management
AACSB: Analytical Thinking

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