CIPS

L4M5
Commercial Negotiation
QUESTION & ANSWERS

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QUESTION 1

Which of the following are most likely to be characteristics of a perfectly competitive market? Select
TWO that apply
A. In a competitive market, both buyers and sellers areprice givers
B. Firms can freely enter or exit the market
C. In a perfectly competitive market, each seller has a large impact on the market priceA perfectly
competitive market consists of products that are all slightly different from one another
D. There are many buyers and sellers in the market

Correct Answer: B,D

Explanation/Reference:

A perfectly competitive market is one with the following features:

- There are many firms producing identical or very similar (homogeneous) goods or services
- There are no barriers toentry to the market or exit from the market - anyone can enter or leave
easily
- Both producers and customers have perfect knowledge of the market place, prices, costs of
production and
influences on demand and supply
Under these conditions, the price andquantity will always tend toward equilibrium as any producer
that sets a
price above equilibrium will not sell anything at all, and any producer that sets a price below a
equilibrium
will obtain 100% market share in theory. The demand curve is perfectly elastic, which means that it
will be
horizontal. In a perfectly competitive market, it is difficult to increase profits through pricing, and
suppliers
instead must focus on their cost structure. As these conditions imply, there are few if any examples of
perfectly competitive market.
LO 2, AC 2.2

QUESTION 2

Which of the following is the most appropriate approach to investors or shareholders who have high
level of influence but low interest in the running of business?
A. Engage and keep them satisfied
B. Engage and consult with them regularly
C. Keep these people inform through general communication media
D. Manage them closely

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Correct Answer: A

Explanation/Reference:

Investors or shareholders who have high level of influence but low interest belong to 'Keep satisfied'
quadrant
of Mendelow's Stakeholder Matrix.
You may read 2 versions from L4M1 and L4M5 here:

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LO 1, AC 1.1

QUESTION 3

At the first stage of CIPSProcurement and Supply Cycle (Understand need), which of the following is
the most important duty of procurement professional?
A. Demand management

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B. Evaluating the interests from suppliers
C. Undertaking 'reverse marketing'
D. Deciding whether RFQ or ITT should be used

Correct Answer: A

Explanation/Reference:

At the first stage of CIPS Procurement and Supply Cycle (Understand need and develop a high-level
specification), procurement professional mainly negotiate with internal stakeholders. They have a
duty
toproportionately and constructively challenge specification if there's genuine doubt over the need or
how the
need is expressed. This is called demand management. Their first duty is to the organisation's
treasury, not to
functional managers.
Demandmanagement including: negotiation/challenge between procurement and internal
stakeholders over the
need/requirement/specification. Remember that in any process or product, the greatest opportunity
for cost
reduction is at the design stage.

QUESTION 4

Which of these personal power bases stems from the manager's position in the organisation and the
authority that lies in that position?
A. Coercive power
B. Legitimate power
C. Expert power
D. Reward power

Correct Answer: B

Explanation/Reference:

Legitimate power comes from the belief that a person has the formal right to make demands, and to
expect
others to be compliant and obedient. Legitimate power comesfrom rules, formal authority,
organisation rank,
staff grade or official position held. In commercial negotiation, legitimate power can be demonstrated
by job
title and rank.
LO 1, AC 1.3

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QUESTION 5

Which type of power is considered the opposite of coercive power?

A. Referent power
B. Informational power
C. Reward power
D. Expert power

Correct Answer: C

Explanation/Reference:

The coercive power comes from the belief that a person can punishothers for non-compliance. It can
be
considered as opposite to reward power, which results from one person's ability to compensate or
reward
another for compliance.
LO 1, AC 1.3

QUESTION 6

Which of the following is the most appropriate pricing arrangement in contracts where major inputs
are commodities?
A. Price adjustment mechanism
B. Cost reimbursable pricingarrangement
C. Standard schedule of rates
D. Fixed pricing arrangement

Correct Answer: A

Explanation/Reference:

In contracts which have major commodity input, the price is determined by market forces with no
individual
supplier or buyer able to influence it significantly.Prices are much more variable even within long term
contracts and seeking a fixed price would create financial risks for both the buyers and the suppliers.
It is often
intelligent to agree a contract price adjustment mechanism to allow for market price changes so both
sides
share risk.

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QUESTION 7

Personal power is only used in distributive approach. Is this statement true?

A. Yes, because only distributive approach to negotiation requires strong personal power
B. No, because personal power can be veryhelpful in integrative approach
C. No, because only organisational power will optimise the negotiation outcomes
D. Yes, because one party will abuse coercive power to maximise the gain

Correct Answer: B

Explanation/Reference:

Power, or more precisely perceptions of power,are critically important in understanding the

commercial
negotiation process. From a commercial negotiation point of view (under any circumstances, either
integrative
or distributive approach), CIPS is interested in power from both a personal and organisational
perspective.
When you are negotiating on behalf of your employer, you bring the power of your organisation (its
brand,
reputation and purchasing spend) as well your own personal power (6 sources of personal power,
based on
French and Raven's power base model) to the negotiation.
In both integrative and distributive approaches, personal power plays an important role. It helps both
parties
push through negotiating barriers and secure commitment and final agreement
LO 1, AC 1.3

QUESTION 8

Which of the following is a disadvantage of absorption costing method?

A. Fixedcost allocated to products on the basis of the cost of activities used in producing them
B. Variable costs are not taken into product final costs
C. Using marginal cost of producing addition units
D. Limited understanding of true costs incurred

Correct Answer: D

Explanation/Reference:

Absorption costing is an approach to allocating overheads in which indirect costs are loaded or

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absorbed into
direct costs related to specific jobs, processes or outputs, using an estimated basis of allocation.
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QUESTION 9

The trust is built based on the other party's professional qualifications or proven or certified technical
capability or experience is known as...?
A. Goodwill trust
B. Contractual trust
C. Irrevocable Trust
D. Competence trust

Correct Answer: D

Explanation/Reference:

Trust is the expectation that the other party will behave in a predictable and mutually acceptable
way. In
inter-firm relationships, the presence and absence of trust can affect the level of cost in a
relationship. The
existence of trust is taught to lower the transaction cost in a relationship. Dr. Mari Sako identified
taxonomy of
3 types of trust in commercial relationship, which is very useful from the perspective of procurement.
Contractual trust: Trust based on the contract with TOP. This is potentially the weakest source of trust
if there
is nothing else to base the trust on, but it is the quickest to establish.
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Competence trust: Trust based on TOP's professional qualifications or proven or certified technical
capability
or experience.
Goodwilltrust: Trust based on knowing TOP has your interest at heart and will not behave
opportunistically.
This is potentially the strongest type of trust, but it takes the longest time to build.

QUESTION 10

In general, which of the following is the consequence of a flatter demand curve?

A. Quantityelastic
B. Price elastic
C. Price inelastic
D. Unit price elastic

Correct Answer: B

Explanation/Reference:

Elasticity refers to the responsiveness of quantity demanded or quantity supplied to a change in price
or
another factor.
In microeconomic graphs,elasticity and inelasticity can be shown by the slope of the demand curve. If
a
demand curve is almost horizontal, then the product pricing can be described as very elastic. If a
demand curve
is almost vertical, then the product pricing can be described asvery inelastic.
The formulae of elasticity:
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LO 2, AC 2.2

QUESTION 11

Which of the following isthe definition of safety margin?

A. The difference between current or forecasted sales and sales at the break-even point
B. The amount of revenue that remains after subtracting costs directly associated with production
C. The production level at which total revenues for a product equal total expenses
D. The incremental money generated for each product/unit sold after deducting the variable costs

Correct Answer: A

Explanation/Reference:

As a financial metric, the margin of safety (safety margin) is equal to the difference between current
or
forecasted sales and sales at the break-even point. The margin of safety is sometimes reported as a
ratio, in
which the aforementioned formula is divided by current or forecasted sales to yield a percentage

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value. The
figure is used in both break-even analysis and forecasting to inform a firm's management of the
existing
cushion in actual sales or budgeted sales before the firm would incur a loss.
This is a question that a student met in her actual exam. The margin of safety is not even mentioned
in the
CIPS study guide.

QUESTION 12

Which of the following are behaviours that builds trust between the buyer and the supplier in business
relationship? Select TWO that apply.
A. Conducting transparent procurement process
B. Over-inflated contingency funds
C. Allowing supplier to involve in early product development
D. Commercial espionage
E. Tendency to blame other party

Correct Answer: A,C

Explanation/Reference:

Trust-building behaviours are as following:

Joint-effort issue resolution
Open sharing of information
Open and honest discussion on root cause of failures
Joint planning focusing on value for money and risk sharing
Commercial transparency and co-proposition of cost reduction and service improvement programmes
Joint recognition and celebration of successes

QUESTION 13

Cost and price analysis is very important for buyers when they are preparing for a negotiation with
supplier. Which of the following is a benefit of knowing supplier's fixed costs?
A. The buyer would be able to know the right volume to reach break-even point
B. The buyer would be able to know the point at which the supplier would reject the offer
C. With the sole understanding of supplier's fixed cost, the buyer would be able to know the volume
at which supplier maximises their profit in short-run
D. The buyer would be able to get a comprehensive picture of supplier's efficiency

Correct Answer: A

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Explanation/Reference:

Knowing supplier's fixed and variable costs is beneficial for the buyer in a negotiation. With these
insights, the
buyer would know the volume atwhich the supplier reaches break-even points and then offers
significant
discount due to economies of scale

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