Domain I – Business Acumen – Section B: Organizational Structure and Business Processes - Bis

Question 1

Inventory Costs

Answer 1

includes Order costs, Holding (Carrying) costs, Stockout costs

Question 2

Order costs

Answer 2

are the costs associated with preparing and making a purchase order.

Question 3

Holding (Carrying) costs

Answer 3

are the costs of storing inventory, which include: rent, insurance, property taxes, control and security costs, costs associated with spoilage, theft, and obsolescence, opportunity cost in terms of holding inventory assets rather than investing in other revenue‐generating assets.

Question 4

Stockout costs

Answer 4

which are the costs associated with running out of inventory, such as negative customer goodwill and lost profits.

Question 5

Economic Order Quantity (EOQ)

Answer 5

is a quantitative method that minimizes the inventory costs.

Question 6

Lead time

Answer 6

is the time between placing an order and receiving it.

Question 7

Reorder Point

Answer 7

represents the inventory level at the time of reorder:

• Reorder Point = Daily Demand (DD) x Lead time (days)
• Daily Demand = D/360

Question 8

Safety Stock

Answer 8

• To avoid stockouts, firms may use safety stock.
• Reorder point with safety stock:
  => Reorder Point = [Daily Demand (DD) x Lead Time (days)] + Safety Stock

Question 9

ABC analysis

Answer 9

divides the firm’s inventory items according to importance into three groups:

a. Group A (Critical items) – make‐up 60‐70% of the firm’s business in dollars but only 10‐15% in the number of items. Apply quantitative methods to manage all items.
b. Group B (Important items) – make‐up 20‐25% of the firm’s business in dollars and 20‐25% in the number of items. Apply quantitative methods to manage selected items.
c. Group C (Low importance items) – make‐up 10‐15% of the firm’s business in dollars but 60‐70% in the number of items. Requires minimum quantitative management control.

Question 10

Just‐in‐time (JIT) systems

Answer 10

are inventory management systems whereby inventory arrives in time for use for manufacturing or sale. The objective of the JIT systems is to minimize inventory and thereby reduce costs associated with holding inventory.

Question 11

Project management techniques

Answer 11

are methods that aid managers to plan, schedule,
monitor, and control the activities involved in projects. Popular techniques for project management include:
1. Gantt Charts
2. Program Evaluation Review Technique (PERT)
3. Critical Path Method (CPM)

Question 12

Gantt Charts

Answer 12

are graphical presentations of resource management and scheduling.
=> They are considered an alternative to PERT/CPM methods to project management and resource
scheduling.

Question 13

PERT (Program Evaluation Review Technique)

Answer 13

is a probabilistic quantitative analysis technique used by project managers to:
=> Plan => Schedule => Monitor => Control

Question 14

Expected Activity Time (T)

Answer 14

= (O + 4M + P) / 6
O = Optimistic time
M = Most likely time
P = Pessimistic time

Question 15

Critical Path

Answer 15

a. The critical path is the longest time path through the network.
b. The critical path is also the minimum time required to complete the project.
c. Any increase or decrease in the critical path will delay or shorten the project.

Question 16

Critical Path Method (CPM)

Answer 16

is a deterministic quantitative analysis technique used by project managers similar to PERT

Question 17

The Theory of Constraints (TOC)

Answer 17

is a management philosophy that focuses on improving
the performance of a constraint that affects the organization’s net income by concentrating available resources on that constraint.

Question 18

Contract

Answer 18

is an enforceable promise (or a set of promises) made between two or more parties.

Question 19

Express contract

Answer 19

is a contract formed by language and may be either oral or written.

Question 20

Implied contract

Answer 20

is a contract formed by actions of either one/or both parties.

Question 21

A contract is considered executory

Answer 21

if there are unperformed duties in the contract.

Question 22

A contract is considered executed

Answer 22

if all the duties in the contract have been performed.

Question 23

Novation (contract)

Answer 23

is a new agreement that substitutes an existing contract.

Question 24

Void (contract)

Answer 24

implies that the contract does not exist even if there are all the other necessary elements of a contract i.e., the contract may not be enforced by either party.

Question 25

Voidable (contract)

Answer 25

implies that the contract may be voided by one of the parties (usually the party at the disadvantage).

Question 26

Elements of an Enforceable Contract

Answer 26

1. Offer may be oral, written, or implied.
2. Acceptance may be oral, written, or implied.
3. Consideration for a contract may be any of the following as requested by the counter party: money, a promise, an act or a forbearance (abstention) to act
4. Legality of Subject Matter – the subject matter of the contract should be legal i.e., a contract to perform an illegal activity is void.
5. Legal Capacity of the Parties – the contracting parties should have legal capacity to engage in contracts.

Question 27

Assignment of Rights and Delegation of Duties

Answer 27

• Assignment of Rights – a party to a contract may assign its rights under the contract to a third party. Generally, any right under a contract may be assigned.
• Delegation of Duties – refers to transfer of duties from a party to the contract to third parties.

Question 28

Fixed‐price Contracts (or lump‐sum contracts)

Answer 28

are contracts in which a fixed total price is determined for a defined product, service, or contract requirements to be provided, regardless of the cost to deliver them.

a. Firm Fixed Price Contracts
b. Fixed Price Incentive Fee Contracts
c. Fixed Price with Economic Price Adjustment Contracts

Question 29

Cost‐Reimbursable Contracts (or Cost Plus Contracts)

Answer 29

are used when the requirements are complex and costs cannot be easily identified and estimated.

a. Cost Plus Fixed Fee Contracts
b. Cost Plus Incentive Fee Contracts
c. Cost Plus Award Fee Contracts

Question 30

Time and Materials Contracts

Answer 30

are used when it is not possible at the time of placing the contract to estimate accurately the scope of the work.

Question 31

Unit‐price Contracts

Answer 31

are contracts where the cost‐per unit is set, but the total units will be quantified as the contract is executed.