Chapter 11 — Strategic Cost Management
1. The price paid for purchased products and services has no direct impact on the end customer’s perception of value
provided by the organization.
a.
True
b.
False
False
Easy
Analytic
2. Price analysis focuses simply on a seller’s price with little or no consideration given to the actual cost of production.
a.
True
b.
False
True
Easy
Analytic
3. With the increased amount of outsourcing occurring in every global company today, the majority of the cost of goods
sold is driven by suppliers, which are outside the four walls of an organization.
a.
True
b.
False
True
Moderate
Analytic
4. Strategic cost management approaches do not vary according to the stage of the product life cycle.
a.
True
b.
False
False
Easy
Analytic
5. As a product reaches its end of life, supply management cannot ignore the potential value of environmental initiatives
to remanufacture, recycle, or refurbish products that are becoming obsolete.
a.
True
b.
False
True
Moderate
6. The major benefits from cost-reduction efforts occur when supply management is not involved in the new-
product/service development cycle.
a.
True
b.
False
False
Easy
Analytic
7. In general, low-value generics in which a competitive market with many potential suppliers exists should emphasize
total delivered price.
a.
True
b.
False
True
Moderate
Analytic
8. When demand exceeds supply, a buyer’s market exists, and prices generally decrease.
a.
True
b.
False
False
Easy
Analytic
9. When supply exceeds demand, a buyer’s market exists, and prices generally move downward.
a.
True
b.
False
True
Easy
Analytic
10. Examples of monopolies in the United States include the steel, automobile, and appliance industries.
a.
True
b.
False
False
Analytic
11. Economic conditions seldom determine whether a market is favorable to the seller or to the purchaser.
a.
True
b.
False
False
Easy
Analytic
12. Some sellers rely on a detailed analysis of internal cost structures to establish price, whereas others simply price at a
level comparable to the competition.
a.
True
b.
False
True
Easy
Analytic
13. In many cases, the price charged by a seller may have little or no relationship to actual costs.
a.
True
b.
False
True
Easy
Analytic
14. A major benefit of multiple sourcing is a lower price that results from the higher volumes offered to a supplier.
a.
True
b.
False
False
Easy
Analytic
15. Although a quantity discount has a positive effect on the purchase price, a buyer need not be cautious about the net
impact on the total cost of an item.
a.
True
Easy
Analytic
Chapter 11 — Strategic Cost Management
b.
False
False
Easy
Analytic
16. The market-share model is also known as the penetration pricing model and is an aggressive pricing approach for
efficient producers because price is a direct function of cost.
a.
True
b.
False
True
Moderate
Analytic
17. The opportunity cost of taking the supplier’s cash discount is almost always higher than the opportunity cost of not
taking the cash discount.
a.
True
b.
False
False
Moderate
Analytic
18. The Consumer Price Index (CPI) tracks material price movements from quarter to quarter, is scaled to a base year
(1988), and tracks the percentage increase in material commodity prices based on a sample of industrial purchasers.
a.
True
b.
False
False
Moderate
Analytic
19. Purchasers impact price at the time they set the specifications for the product or service.
a.
True
b.
False
True
Easy
Analytic
Chapter 11 — Strategic Cost Management
20. A seller’s cost structure affects price because, in the long run, the seller must price at a level that covers all variable
costs of production, contributes to some portion of fixed costs, and contributes to some level of profit.
a.
True
b.
False
Moderate
Analytic
21. How well suppliers purchase their goods and services has no direct impact on purchase price levels.
a.
True
b.
False
False
Easy
Analytic
22. Break-even analysis includes both cost and revenue data for an item to identify the point where revenue equals costs,
and the expected profit or loss at different production volumes.
a.
True
b.
False
True
Moderate
Analytic
23. A should-cost model can lead the procurement manager to better understand elements of overhead, mark-ups on non-
value-added costs, and other components that can undermine price inflation.
a.
True
b.
False
True
Moderate
Analytic
24. At the highest levels of the organization, top management uses break-even analysis as a strategic planning tool.
a.
True
b.
False
True
Easy
25. Most large firms base purchase decisions and evaluation suppliers on only the cost elements of unit price,
transportation, and tooling.
a.
True
b.
False
False
Easy
Analytic
26. Building a TCO model is an easy task.
a.
True
b.
False
False
Easy
Analytic
27. The value of money spent any time in the future does not depend on the organization’s cost of capital.
a.
True
b.
False
False
Moderate
Analytic
28. Target pricing is an innovative approach used in the final stages of the product life cycle to establish a contract price
between a buyer and a seller.
a.
True
b.
False
False
Easy
Analytic
29. The cost of a new product is no longer an outcome of the product design process; rather, it is an input to the process.
a.
True
b.
False
Analytic
Chapter 11 — Strategic Cost Management
True
Easy
Analytic
30. Under penetration pricing, using final price as a basis, the product is disaggregated into major subsystems, each of
which has its own target cost.
a.
True
b.
False
False
Moderate
Analytic
31. Under traditional pricing approaches, product cost + profit = selling price.
a.
True
b.
False
True
Easy
Analytic
32. Using a traditional pricing approach, the selling price – profit = allowable product cost.
a.
True
b.
False
False
Easy
Analytic
33. The difference between the supplier’s price and the target cost becomes the strategic cost-reduction objective.
a.
True
b.
False
True
Easy
Analytic
34. In setting target prices and target costs, the new-product development team should bear in mind the cardinal rule of
target costing: the target cost can never be violated.
Chapter 11 — Strategic Cost Management
a.
True
b.
False
True
Moderate
Analytic
35. If total costs are less than target costs, the design must change or costs must be reduced.
a.
True
b.
False
False
Easy
Analytic
36. Traditional pricing practices have supported cooperative efforts to make design, product, and process improvements
with suppliers.
a.
True
b.
False
False
Easy
Analytic
37. Identification of all costs provides the basis for establishing joint improvement targets.
a.
True
b.
False
True
Easy
Analytic
38. The main risk in target and cost-based pricing concerns volume variability.
a.
True
b.
False
True
Easy
Analytic
Chapter 11 — Strategic Cost Management
39. A cost-based approach to determining price is clearly appropriate for all purchased items.
a.
True
b.
False
False
Easy
Analytic
40. A cost-based approach to supplier pricing is feasible when the seller contributes high added value to an item through
direct or indirect labor and specialized expertise.
a.
True
b.
False
True
Moderate
Analytic
41. _____ = (Quality + Technology + Service + Cycle Time) ÷ Price.
a.
b.
c.
d.
e.
Moderate
Analytic
42. _____ refers to the process of comparing supplier prices against external price benchmarks, without direct knowledge
of the supplier’s costs.
a.
Cost analysis
b.
Make-buy analysis
c.
Target costing
d.
Price analysis
e.
Total cost analysis
Easy
Analytic
43. _____ is the process of analyzing each individual cost element (i.e., material, labor hours and rates, overhead, general
Chapter 11 — Strategic Cost Management
and administrative costs, and profit) that together add up to the final price.
a.
Price analysis
b.
Cost analysis
c.
Cost analysis
d.
Total cost analysis
e.
Make-buy analysis
Easy
Analytic
44. _____ applies the price/cost equation across multiple processes that span two or more organizations across a supply
chain.
a.
Make-buy analysis
b.
Price analysis
c.
Cost analysis
d.
Target costing
e.
Total cost analysis
Easy
Analytic
45. In the framework for strategic cost management, _____ are high-value products or services and can be sourced
through traditional bidding approaches that require price analysis using market forces to do the work and identify what is
a competitive price.
a.
critical products
b.
unique products
c.
custom-made products
d.
generics
e.
commodities
Moderate
Analytic
46. Which of the following is not one of the categories of products in the strategic cost management matrix?
a.
Commodities.
b.
One-time buys.
c.
Critical products.
d.
Unique products.
e.
Generics.
Chapter 11 — Strategic Cost Management
Moderate
Analytic
47. A _____ is an analytical tool that identifies the primary external forces that are causing prices to either increase or
decrease.
a.
market analysis
b.
total cost analysis
c.
cost analysis
d.
make-buy analysis
e.
target price analysis
Easy
Analytic
48. In a/an _____ market structure, there exist identical products with minimal barriers for new suppliers to enter the
market, and price is solely a function of the forces of supply and demand.
a.
monopolistic
b.
oligopolistic
c.
communistic
d.
perfect competition
e.
Price is never solely a function of supply and demand, regardless of market structure.
Easy
Analytic
49. Which of the following is not one of the questions that should be asked when analyzing a seller’s pricing strategy?
a.
Does the seller have a long-term pricing strategy, or is it short-term in nature?
b.
Is the seller a price leader or a price follower?
c.
How many employees does the seller’s plant employ?
d.
Is the seller attempting to establish entry barriers to other competitors by establishing a low price initially, then
preparing to raise prices later in the future?
e.
Is the seller using a cost-based pricing approach or a market-based pricing approach?
Moderate
Analytic