Chapter 17 Sourcing Answer Key
Multiple-Choice Questions
1. Which of the following is a sourcing strategic decision?
2. Purchasing activities include
3. Which of the following is a purchasing decision?
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4. When purchasing finds savings in the cost of goods sold,
5. Which of the following statements concerning sourcing is true?
6. The profit leverage effect (ratio) is calculated by
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7. A company has sales of $150 million, cost of goods sold of $100 million, and a before-tax
profit of 8%. If purchasing was able to reduce the cost of goods sold by $5 million, how much
additional sales would be required to achieve the same impact on profit?
8. A company has the following financial information (in millions of $):
Sales $277
Cost of goods sold
Direct labor 21
Materials 133
Overhead 17
All other costs 71
Pretax earnings 35
What is the profit leverage effect for this firm?
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9. A company has the following financial information (in millions of $):
Sales $277
Cost of goods sold
Direct labor 21
Materials 133
Overhead 17
All other costs 71
Pretax earnings 35
What is the percentage increase in earnings from a 5% savings in materials purchasing?
10. Common goals for sourcing include all of the following EXCEPT
11. Concerning outsourcing, which of the following is considered a qualitative cost (that is, a
cost that is difficult to quantify)?
12. Which of the following is NOT a disadvantage of outsourcing?
13. Offshoring refers to
14. A manufacturer has decided to outsource and offshore a small electric motor that it currently
manufactures itself. It has found an offshore supplier that charges $925,000 for a minimum order
quantity of 5,000 motors. Shipping costs for this quantity are $15,000. The buyer expects to
place four orders per year to meet its annual need for 20,000 motors. Annual carrying cost is
25% of unit price, and import tariffs are 12% of unit price. The company expects to spend
$12,500 per year on contracting and relationship maintenance. What is the total cost of
outsourcing and offshoring this motor?
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15. The main reason for offshoring is
16. Which of the following indicates an item to be a good candidate for outsourcing?
17. Which of the following is NOT a reason to reshore a purchased item?
18. The first step in a supply base optimization effort is
19. Spend analysis includes
20. A purchasing executive concerned about a perceived lack of control over purchasing
activities should
21. Consider the following statements:
(1) The purpose of spend analysis is to find opportunities to reduce cost by
consolidating spending.
(2) The purpose of spend analysis is to find opportunities to reduce cost by
moving all spending to a single supplier.
22. The three tactics companies have been using to reduce the number of suppliers are
23. To reduce the risk of supply disruption, a company should