MGSC 487 GAFFNEY FINAL EXAM QUESTIONS AND
ANSWERS | LATEST UPDATE
Fair Price - Answers - The lowest price that ensures a continuous supply of the proper
quality where and when needed.
Occurs over long-run only if the supplier's making a reasonable profit
4 Factors of Fair and Just Price - Answers - 1. Past experience: talk to other people,
look at reports
2. Knowledge of Production: understand what/how
3. Cost of Production: supplier is doing
4. Logistics Costs: lead time, holding costs
Cost Approach - Answers - - Price is set greater than direct costs, allowing for sufficient
contribution to cover indirect costs and overhead, and leaving a margin for profit (price
is a certain amount over direct costs and allow contribution to cover indirect costs and
profit)
- Purchaser seeks lower cost suppliers, manufacturing, and/ or service alternatives
- Reverse engineer
- Negotiation
Market Approach - Answers - • Prices are set in the marketplace and may not be
directly related to cost
• Follows supply and demand model
Example: Oil, gold
Find a way around it:
• Select suppliers who have other incentives
• Substitute "like" materials: Aluminum instead of copper
(parking brake failure example) --> air freight for immediate recovery
• Outsource (or insource)
• Establish long-term contracts: forward-buying
, Government/ Regulatory Influence - Answers - - Government sets production and
import quotas
- Tariffs
- Regulation of buyer and seller behavior
- Set prices for government run organizations
Sherman Anti-trust Act (1890) - Answers - - Price fixing is illegal (Hershey, Nestle, Mars
chocolate example)
Robinson-Patman Act (1936) - Answers - - Illegal to sell to customers at different prices
(one price law)
Exceptions:
- Large purchase quantity
- Moving obsolete material (trying to get rid of unused stock by selling it at a lower than
market value price)
- Meeting local competition (gas station example)
Types of Purchases - Answers - 1. Raw Materials
- includes sensitive commodities such as copper, wheat, petroleum, steel, and so forth
2. Special Items
3. Standard Items
- nuts and bolts from Walmart
4. Small Value Items (MRO)
- whatever is needed to keep operations running
5. Capital Goods
- land, buildings,equipment, patents, copyrights
6. Services
- advertising, security, 3PL, consulting, insurance
7. Resale
- private branding, batteries and accessories sold at gas stations
Firm Fixed Price (FFP) - Answers - - Price does not change under any circumstances
- Risk reduction
- Preferred by buyer
ANSWERS | LATEST UPDATE
Fair Price - Answers - The lowest price that ensures a continuous supply of the proper
quality where and when needed.
Occurs over long-run only if the supplier's making a reasonable profit
4 Factors of Fair and Just Price - Answers - 1. Past experience: talk to other people,
look at reports
2. Knowledge of Production: understand what/how
3. Cost of Production: supplier is doing
4. Logistics Costs: lead time, holding costs
Cost Approach - Answers - - Price is set greater than direct costs, allowing for sufficient
contribution to cover indirect costs and overhead, and leaving a margin for profit (price
is a certain amount over direct costs and allow contribution to cover indirect costs and
profit)
- Purchaser seeks lower cost suppliers, manufacturing, and/ or service alternatives
- Reverse engineer
- Negotiation
Market Approach - Answers - • Prices are set in the marketplace and may not be
directly related to cost
• Follows supply and demand model
Example: Oil, gold
Find a way around it:
• Select suppliers who have other incentives
• Substitute "like" materials: Aluminum instead of copper
(parking brake failure example) --> air freight for immediate recovery
• Outsource (or insource)
• Establish long-term contracts: forward-buying
, Government/ Regulatory Influence - Answers - - Government sets production and
import quotas
- Tariffs
- Regulation of buyer and seller behavior
- Set prices for government run organizations
Sherman Anti-trust Act (1890) - Answers - - Price fixing is illegal (Hershey, Nestle, Mars
chocolate example)
Robinson-Patman Act (1936) - Answers - - Illegal to sell to customers at different prices
(one price law)
Exceptions:
- Large purchase quantity
- Moving obsolete material (trying to get rid of unused stock by selling it at a lower than
market value price)
- Meeting local competition (gas station example)
Types of Purchases - Answers - 1. Raw Materials
- includes sensitive commodities such as copper, wheat, petroleum, steel, and so forth
2. Special Items
3. Standard Items
- nuts and bolts from Walmart
4. Small Value Items (MRO)
- whatever is needed to keep operations running
5. Capital Goods
- land, buildings,equipment, patents, copyrights
6. Services
- advertising, security, 3PL, consulting, insurance
7. Resale
- private branding, batteries and accessories sold at gas stations
Firm Fixed Price (FFP) - Answers - - Price does not change under any circumstances
- Risk reduction
- Preferred by buyer
