Introduction to Operations & Supply Chain Management, 5e (Bozarth)
Chapter 7 Supply Management
7.1 Why Supply Management is Critical
1) Firms do not compete only against global competitors, but against:
A) their suppliers.
B) themselves.
C) the customers of their competitors.
D) their competitors’ supply chains.
2) The percentage of value of shipments that come from materials for the average manufacturer is:
A) greater than or equal to 40 and less than or equal to 49 percent.
B) greater than or equal to 50 and less than or equal to 59 percent.
C) greater than or equal to 60 and less than or equal to 69 percent.
D) greater than or equal to 70 percent.
3) The ratio of earnings to sales for a given time period is the:
A) cost of goods sold.
B) merchandise inventory.
C) profit margin.
D) return on assets.
4) The analyst turned on his banker’s lamp, adjusted his eye shade, and slowly pulled a legal pad from
his desk. His weathered hands punched the buttons on his desk calculator deliberately as he divided
earnings by total assets in order to calculate:
A) return on assets.
B) cost of goods sold.
C) merchandise inventory.
D) profit margin.
5) Flingers Inc. reveals the following information in their annual report for FY 2018
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
What is Flingers’ return on assets?
A) 16%
B) 20%
C) 25%
D) 40%
6) Flingers Inc. reveals the following information in their annual report for FY 2018
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
What is Flingers’ profit margin?
A) 5%
B) 16%
C) 2%
D) 4%
7) Flingers Inc. reveals the following information in their annual report for FY 2017
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
Every dollar Flingers saves in purchasing has the same impact as what amount of increased sales?
A) $10
B) $14
C) $17
D) $20
8) Flingers Inc. reveals the following information in their annual report for FY 2017
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
Upper management plans to cut cost of goods sold by 5% for the coming year but retain the same sales.
What will Flingers’ return on assets figure be for 2018
A) 26%
B) 29%
C) 33%
D) 38%
9) Flingers Inc. reveals the following information in their annual report for FY 2017
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
Upper management plans to cut cost of goods sold by 5% for the coming year but retain the same sales.
What will Flingers’ profit margin be for 2018
A) 5%
B) 7.5%
C) 9%
D) 11%
10) Flingers Inc. reveals the following information in their annual report for FY 2017
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
Upper management plans to cut cost of goods sold by 5% for the coming year but retain the same sales.
What will Flingers’ profit leverage effect be for 2018
A) $13.33
B) $14.71
C) $17.50
D) $18.50
11) The phenomenon that a dollar in cost savings increases pretax profits by a dollar, while a dollar
increase in sales increases pretax profits only by the dollar multiplied by the pretax profit margin is
known as the:
A) profit margin.
B) return on assets.
C) saving to spending ratio.
D) profit leverage effect.
12) Dusty is evaluating three bids to supply fence hardware for the 5 acres of pasture that need to be
fenced. Breezy submits a bid of $40 per unit with a defect rate of 2%; Lady’s bid is $50 per unit with a
defect rate of 0.5%; and Spike’s bid is $30 per unit with a defect rate of 5%. If a section of fence fails, it
costs an average of $500 in losses and herding costs to round up all of the capybaras. Dusty believes it
will take 1000 units to fence in this pasture configuration; what is the lowest total cost?
A) $47,500
B) $50,000
C) $52,500
D) $55,000
13) Dusty is evaluating three bids to supply fence hardware for the 5 acres of pasture that need to be
fenced. Breezy submits a bid of $40 per unit with a defect rate of 3%; Lady’s bid is $50 per unit with a
defect rate of 0.5%; and Spike’s bid is $30 per unit with a defect rate of 5%. If a section of fence fails, it
costs an average of $500 in losses and herding costs to round up all of the capybaras (giant rodents from
South America — their leather makes fine gloves). Dusty believes it will take 500 units to fence in this
pasture configuration; which supplier should win the business?
A) Spike
B) Breezy
C) Lady
D) no difference between Breezy and Spike
14) Dusty is evaluating two bids to supply fence hardware for the 5 acres of pasture that need to be
fenced. Breezy submits a bid of $40 per unit with a defect rate of 3%; Lady’s bid is $50 per unit and their
product manager estimates the defect rate to be around 0.5%. If a section of fence fails, it costs an average
of $500 in losses and herding costs to round up all of the capybaras (giant rodents from South America —
their leather makes fine gloves). Dusty believes it will take 500 units to fence in this pasture configuration.
The product manager’s uncertainty has Dusty concerned; what defect rate for Lady would make Dusty
indifferent between the two suppliers as far as total cost is concerned?
A) 1%
B) 0.5%
C) 0.33%
D) 0%
15) Dusty is evaluating three bids to supply fence hardware for the 5 acres of pasture that need to be
fenced. Breezy submits a bid of $40 per unit, Lady’s bid is $50 per unit, and Spike’s bid is $30 per unit. If a
section of fence fails, it costs an average of $500 in losses and herding costs to round up all of the
capybaras (giant rodents from South America — their leather makes fine gloves). Dusty believes it will
take 500 units to fence in this pasture configuration. What defect rates for the three suppliers would make
Dusty indifferent among them from a total cost standpoint?
A) Breezy 5%, Spike 6%, Lady 2%
B) Breezy 3%, Spike 5%, Lady 1%
C) Breezy 1%, Spike 3%, Lady 2%
D) Breezy 2%, Spike 3%, Lady 4%
16) For the average manufacturer, over 50 percent of the value of shipments comes from materials.
17) Company A spends $250 million purchasing materials and subassemblies that it processes and sells
for a total of $350 million. The cost of goods sold by Company A is $350 million.
18) The ratio of earnings to sales for a given time period is a firm’s profit margin.
19) Profit margin is the ratio of ________ to ________.
20) Flingers Inc. reveals the following information in their annual report for FY 2017
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
Calculate Flingers’ profit margin, return on assets, and leverage effect
21) Flingers Inc. reveals the following information in their annual report for FY 2017
Earnings and Expenses
Sales
$10,000,000
Cost of goods sold
$5,000,000
Pretax earnings
$500,000
Selected Balance Sheet Items
Merchandise inventory
$80,000
Total assets
$2,000,000
They plan to aggressively pursue cost savings in the purchasing area for FY 2018 and expect to lower
their cost of goods sold by 8% while maintaining the same level of sales. Calculate Flingers’ leverage
effect for 2017and their expected leverage effect for 2018. Compare the two results for your leverage effect
calculations and provide insight as their relative magnitude.
22) Dusty is evaluating three bids to supply fence hardware for the 5 acres of pasture that need to be
fenced. Breezy submits a bid of $40 per unit with a defect rate of 2%; Lady’s bid is $50 per unit with a
defect rate of 0.5%; and Spike’s bid is $30 per unit with a defect rate of 5%. If a section of fence fails, it
costs an average of $500 in losses and herding costs to round up all of the capybaras, giant rodents native
to Brazil. Dusty believes it will take 1000 units to fence in this pasture configuration; what is the BEST
choice for supplier?
7.2 The Strategic Sourcing Process
1) When compared with single sourcing, multiple sourcing has the advantage of:
A) spreading risk.
B) volume leveraging.
C) lower transportation costs.
D) reduced quality variability.
2) Single sourcing is a better choice than multiple sourcing because of the following:
A) increased competition.
B) ensuring that a supplier will not become complacent.
C) spreading risk.
D) gaining access to the supplier’s design and engineering capabilities.
3) A sourcing strategy in which two suppliers are used for the same purchased product or service is:
A) cross sourcing.
B) dual sourcing.
C) contingency sourcing.
D) multisourcing.
4) The purchasing team examined all of its purchasing patterns in order to identify any irregularities or
possible areas of cost savings. This refers to:
A) internal auditing.
B) purchase consolidation.
C) spend analysis.
D) cooking the books.
5) Which of the following is required in order to execute a successful spend analysis?
A) graphics capabilities found in charting packages and Visio
B) a sophisticated statistical software package such as SPSS or SAS
C) ability to analyze large quantities of data
D) a minimum of six months uninterrupted work time
6) In a typical portfolio analysis, office supplies are placed in the:
A) leverage quadrant.
B) bottleneck quadrant.
C) critical quadrant.
D) routine quadrant.
7) The primary goal of this quadrant is to ensure a continuous supply of products or services found in
the:
A) leverage quadrant.
B) bottleneck quadrant.
C) critical quadrant.
D) routine quadrant.
8) Building relationships for key suppliers and preparing contingency plans in case of supply
interruptions is vital for products or services found in the:
A) leverage quadrant.
B) bottleneck quadrant.
C) critical quadrant.
D) routine quadrant.
9) A supplier that has previously demonstrated its performance capabilities through purchase contracts
may well receive:
A) maverick status.
B) a request for description.
C) preferred supplier status.
D) a request for proposal.
10) A company using portfolio analysis decides to streamline the purchasing process for a few items by
use of EDI and automated requisitions to the greatest extent possible. The quadrant that these items fall
in is most likely the:
A) bottleneck quadrant.
B) critical quadrant.
C) leverage quadrant.
D) routine quadrant.
11) Competitive bidding, active sourcing, and using industry standards are all actions that are
appropriate if the sourcing strategy is to:
A) form partnerships with suppliers.
B) maximize commercial advantage.
C) simplify the acquisition process.
D) ensure supply continuity.
12) The use of supply chain partners to provide products or services is called:
A) outsourcing.
B) insourcing.
C) offloading.
D) partnering.
13) One advantage of outsourcing is that it:
A) gives the company a high degree of control over its operations.
B) increases the company’s access to state-of-the-art products and processes.
C) protects the company’s proprietary designs and processes.
D) discourages the development of the company’s core competencies.
14) Which of these is a direct cost associated with outsourcing?
A) direct material
B) direct labor
C) variable overhead
D) price from invoice
15) Which of these is an indirect cost associated with insourcing?
A) maintenance
B) purchasing
C) receiving
D) quality control
16) The deans’ suite hoped to cut costs and decided to perform a total cost analysis on its vodka supplier.
Consumption was currently 6,000 bottles per semester and this was predicted to maintain that level for
the next few years. Their current source, Byron’s, charged $9.50 per bottle and packed 288 bottles in a
crate. The cost to ship the crate was $15. Another potential source of vodkas was Pancho’s, who charged
$9.00 per bottle but could ship only 100 bottles in a crate and at a higher price, $20. Assume that a partial
crate may be purchased. What is the total annual cost to supply vodka from their current supplier?
A) $54,000
B) $55,200
C) $57,000
D) $57,312
17) The deans’ suite hoped to cut costs and decided to perform a total cost analysis on its vodka supplier.
Consumption was currently 6,000 bottles per semester and this was predicted to maintain that level for
the next few years. Their current source, Byron’s, charged $9.50 per bottle and packed 288 bottles in a
crate. The cost to ship the crate was $15. Another potential source of vodkas was Pancho’s, who charged
$9.00 per bottle but could ship only 100 bottles in a crate and at a higher price, $20. Assume that a partial
crate may be purchased. What is the total annual cost to supply vodka from Pancho’s?
A) $54,000
B) $55,200
C) $57,000
D) $57,312
18) The deans’ suite hoped to cut costs and decided to perform a total cost analysis on its vodka supplier.
Consumption was currently 6,000 bottles per semester and this was predicted to maintain that level for
the next few years. Their current source, Byron’s, charged $9.25 per bottle and packed 500 bottles in a
crate. The cost to ship the crate was $5. Another potential source of vodkas was Pancho’s, who charged
$9.20 per bottle but could ship only 100 bottles in a crate. Assume that a partial crate may be purchased.
At what annual shipping price per crate from Pancho’s would the college face equal total costs?
A) $7.00
B) $6.50
C) $6.00
D) $5.50
19) This table contains the performance criteria and scores (larger numbers are better) for four potential
suppliers to Kramerica Industries. Evaluate the data and identify the BEST source for Kramerica.
Company A
Company B
Company C
Company D
3
4
2
5
4
3
5
3
5
3
4
2
2
5
5
4
A) Company A
B) Company B
C) Company C
D) Company D
20) This table contains the performance criteria and scores (larger numbers are better) for four potential
suppliers to Los Pollos Hermanos. Evaluate the data and identify the BEST source for Los Pollos
Hermanos.
Company W
Company P
Company D
Company G
5
4
2
5
4
3
5
2
2
1
4
5
3
5
5
2
A) Company W
B) Company P
C) Company G
D) Company D