Chapter 4

Question 1

Types of managers

Answer 1

1. Resource-based theory
2. Transaction costs

Question 2

Resource-based theory

Answer 2

make where unique resources can monopolise the market

Question 3

Transaction cost

Answer 3

Emphasise relationships between people (people making and people buying)
—> advocate making where employees are exceptional and can be more easily monitored than buying from a market

Question 4

How is the accuracy of different estimates classified by the American Association of Cost Engineers?

Answer 4

1. ORDER-OF-MAGNITUDE (or ratio estimate)
   — based on: similar previous cost data
   — probable accuracy: < 30%.
   — Cost of estimate: low.
2. STUDY (or factor) estimate
   — based on: knowledge of major items of equipment
   — probable accuracy: 30%
   — Cost of estimate: low to medium.
3. PRELIMINARY, budget authorisation, (or scope estimate)
   — based on: sufficient data to permit the estimate to be budgeted
   — probable accuracy: within 20%
   — Cost of estimate: medium.
4. DEFINITE (or project control)
   — based on: almost complete data but before completion of drawings and specifications
   — probable accuracy: within 10%
   — Cost of estimate: medium to high
5. DETAILED (or contractor’s) estimate
   — based on: complete engineering drawings, specification, and site surveys
   — probable accuracy: within 5%
   — Cost of estimate: high

Question 5

Economies of scale factor

Answer 5

M<1 —> economies
M>1 —> diseconomies
M=0 —> no increased cost for increased capacity

Question 6

Economies of scale capacity formula

Answer 6

Cost of A= Cost of B x (Quantity of A/Quantity of B)^M

Question 7

Labour costs

Answer 7

1. Assessment of labour costs - based on the amount of work required to produce the product
2. Rate is labour- direct wages and contributions