MGSC 487 EXAM 2 VERIFIED STUDY GUIDE
`Fair and Just Price - Answers - - Lowest price that ensures a continuous supply of
proper quality where and when needed
- Accuracy in making the judgement depends on:
-Past Experience
-Knowledge of production processes
-Costs of production process
-Logistics Costs
Making sure that the price is low but also that the supplier is making a decent profit
Continuous Supply - Answers - -Only possible in the long run from a supplier who is
making reasonable profit
- Suppliers totals costs must be covered by total sales in the long run
Meaning of Cost- Direct - Answers - - Can be specifically and accurately assigned to a
given unit of production or a specific identifiable task performed by a service provider.
-Direct labor costs are the wages paid to the professionals and fees paid to contract or
freelance labor to deliver the service
Meaning of Cost- Indirect - Answers - -Incurred in the operation of a production plant or
process or service organization, but normally cannot be related directly to any given unit
of production or service provided.
Ex: Rent, property taxes, machine depreciation, expenses of general supervisors, data
processing power, heat, and light
-Often referred to as overhead- May be fixed or variable
Classification of Costs- Variable - Answers - - Most are direct costs because they vary
directly to any given unit of production or service provided
Classification of Costs- Semi Variable - Answers - - May vary with the number of units
produced but are partly variable and partly fixed.
Ex: more heat, light, and power are used when a plant is operating at 90% capacity than
when operating at 50% capacity
,Classification of Costs- Fixed - Answers - - Generally remain the same regardless of the
number of units produced
Ex: real estate taxes will be the same for a given period of time regardless of whether
one unit or 100,000 units are produced
Establishing Price- 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
- Provides the purchaser with opportunities to seek lower-cost suppliers, to suggest
lower-cost manufacturing or service alternatives, and to question the size of the margin
over direct costs
- Negotiation as well as cost-analysis techniques is a useful tool
Establishing Price- Market Approach - Answers - - Prices are set in the marketplace and
may not be directly related to cost.
>Follows supply and demand
model (Ex: Oil and gold). If
demand is high relative to
supply, then prices are
expected to rise
>If price can't be budged, its
still possible to select suppliers
with nonprice incentives, like
excellent service, delivery,
early warning of price changes
>Negotiation here centers on
items other than price
- Find a way around it:
>Select suppliers who have
other incentives
>Substitute "like" materials
(aluminum instead of copper
>Outsource (or insource)
>Establish long term contracts:
forward buying
Government influence on Pricing - Answers - -Government sets production and import
quotas
-Tariffs and export permits
-Regulation of buyer and seller behavior- water/electricity utility services
, -Set prices for government run organizations- US Postal Service
Sherman Antitrust 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)
Firm Fixed price (FFP) - Answers - -Price does not change under any
circumstances
-Risk Reduction
-Preferred by Buyer
Cost Plus Fixed Fee (CPFF) - Answers - -Offer occurs if the item is experimental and
the specifications are not firm or if the costs in the future cannot be
predicted
-Buyer agrees to reimburse the supplier for all reasonable costs incurred (strictly
defined before signing) in doing the job
-PLUS a specified dollar amount of profit
-Some negotiation on fixed fee, but not on cost
-A maximum amount may be specified for the cost
-Profit margin decreases for the supplier as the cost increases, so there is an incentive
for them to control costs
Cost no Fee (CNF) - Answers - -Buyer only pays supplier for costs
-Buyer persuades supplier that subsidiary (less important than but related) benefits are
sufficient
`Fair and Just Price - Answers - - Lowest price that ensures a continuous supply of
proper quality where and when needed
- Accuracy in making the judgement depends on:
-Past Experience
-Knowledge of production processes
-Costs of production process
-Logistics Costs
Making sure that the price is low but also that the supplier is making a decent profit
Continuous Supply - Answers - -Only possible in the long run from a supplier who is
making reasonable profit
- Suppliers totals costs must be covered by total sales in the long run
Meaning of Cost- Direct - Answers - - Can be specifically and accurately assigned to a
given unit of production or a specific identifiable task performed by a service provider.
-Direct labor costs are the wages paid to the professionals and fees paid to contract or
freelance labor to deliver the service
Meaning of Cost- Indirect - Answers - -Incurred in the operation of a production plant or
process or service organization, but normally cannot be related directly to any given unit
of production or service provided.
Ex: Rent, property taxes, machine depreciation, expenses of general supervisors, data
processing power, heat, and light
-Often referred to as overhead- May be fixed or variable
Classification of Costs- Variable - Answers - - Most are direct costs because they vary
directly to any given unit of production or service provided
Classification of Costs- Semi Variable - Answers - - May vary with the number of units
produced but are partly variable and partly fixed.
Ex: more heat, light, and power are used when a plant is operating at 90% capacity than
when operating at 50% capacity
,Classification of Costs- Fixed - Answers - - Generally remain the same regardless of the
number of units produced
Ex: real estate taxes will be the same for a given period of time regardless of whether
one unit or 100,000 units are produced
Establishing Price- 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
- Provides the purchaser with opportunities to seek lower-cost suppliers, to suggest
lower-cost manufacturing or service alternatives, and to question the size of the margin
over direct costs
- Negotiation as well as cost-analysis techniques is a useful tool
Establishing Price- Market Approach - Answers - - Prices are set in the marketplace and
may not be directly related to cost.
>Follows supply and demand
model (Ex: Oil and gold). If
demand is high relative to
supply, then prices are
expected to rise
>If price can't be budged, its
still possible to select suppliers
with nonprice incentives, like
excellent service, delivery,
early warning of price changes
>Negotiation here centers on
items other than price
- Find a way around it:
>Select suppliers who have
other incentives
>Substitute "like" materials
(aluminum instead of copper
>Outsource (or insource)
>Establish long term contracts:
forward buying
Government influence on Pricing - Answers - -Government sets production and import
quotas
-Tariffs and export permits
-Regulation of buyer and seller behavior- water/electricity utility services
, -Set prices for government run organizations- US Postal Service
Sherman Antitrust 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)
Firm Fixed price (FFP) - Answers - -Price does not change under any
circumstances
-Risk Reduction
-Preferred by Buyer
Cost Plus Fixed Fee (CPFF) - Answers - -Offer occurs if the item is experimental and
the specifications are not firm or if the costs in the future cannot be
predicted
-Buyer agrees to reimburse the supplier for all reasonable costs incurred (strictly
defined before signing) in doing the job
-PLUS a specified dollar amount of profit
-Some negotiation on fixed fee, but not on cost
-A maximum amount may be specified for the cost
-Profit margin decreases for the supplier as the cost increases, so there is an incentive
for them to control costs
Cost no Fee (CNF) - Answers - -Buyer only pays supplier for costs
-Buyer persuades supplier that subsidiary (less important than but related) benefits are
sufficient
