Question 1: Incorrect

Which kind of these following costs belong to fixed costs? Select TWO options

The annual business rate charged by local authorities

(Incorrect)

The costs of leasing or purchasing capital equipment

(Correct)

The depreciation of capital inputs due to wear and tear

(Correct)

The packaging and distribution costs

The costs of electricity and gas

Explanation
Fixed costs are business costs that remain the same irrespective of the volume of activity of a
business.
Among above costs, leasing and depreciation are relatively static and do not change if volume of
business activities increase or reduce.
Variable cost is the cost that varies with the level of output of an organisation. Packaging,
utilities and annual business rate (tax) are variable costs
LO 1, AC 1.2
Question 2: Correct
Which of the following approach is used to compare price in the market? Select TWO that
apply:


 Bidding price

Target price

Competitive bidding

Price indices

(Correct)

Pricing formula

(Correct)

Explanation
To compare the price in the market, price comparator should be used. Price comparator is a price
that can be used as a benchmark against which the price of other products with similar
characteristics can be assessed. There are three sources of price comparators:
- Prices that have been paid in the past (including price indices)
- Published prices (prices that can be found in the catalogues)
- Pricing formula
LO 1, AC 1.2
Question 3: Correct
Which of the following may allow suppliers free to choose the materials, manufacturing
process or delivery process?

Technical specifications

Design specification


Conformance specification

Performance specification

(Correct)

Explanation
Performance specification describes the outputs or outcomes that are expected with the detailed
design of the product or service left to the supplier to decide
Technical specifications is a detailed technical description together with acceptance criteria that
forms the basis of a product design. A technical specification details the standards that a product
or service must meet.
'Conformance specification' and 'Design specification' give precise details about how a
product is to be made.
LO3, AC 3.1
Question 4: Correct
OMK is a Russian steel firm that is expanding market abroad. The CPO desires to bring
purchasing activities in line with the company’s ethos to be better and one step ahead. He
and his team sum up 36 categories which cover approximately 90% of spend. He also
establishes cross-functional teams that included anyone connected to the category. Each
specification writing within a cross-functional team is treated as a project. Which of the
following document should be preceded specification writing in each cross-functional
team?

SoW

PID

(Correct)

Mindmap


BRD
Explanation
A Project Initiation Document (called a PID) is an important document and should precede
any specification writing project. It sets out the scope of the project and it is the team's mandate
from senior management.
Mindmap is a diagram used to visually organize information. A mind map is hierarchical and
shows relationships among pieces of the whole
BRD is business requirement definition which sets out what the product or service needs to
achieve if all stakeholders are to be satisfied
SoW is detailed description of the specific tasks or services a contractor must perform under the
term of a contract
LO 3, AC 3.3
Question 5: Correct
After assessing objectives, costs and benefits of generated options, which of the following
are the other criteria that management team might use to evaluate a new business case?
1. Plan for implementation
2. Identify objectives
3. Develop strategies
4. Assess potential risk

1 and 4 only

(Correct)

1 and 3 only

2 and 4 only

2 and 3 only
 Explanation
A business case typically has some criteria such as Objectives, Options, Cost and Benefit, Risk
assessment and Implementation plan.
Objectives: The first criterion is to read the business case and assess the objectives of the
proposal. Is this clear what the objectives are? If so, do they reflect a real and legitimate business
opportunity or problem? The good ways to test whether or not an objective is genuine
opportunity or problem is to use '5 Whys' analysis or issue management method.
Options: If the business case has meaningful and worthwhile objectives, senior management
will look at the way in which those objectives will be achieved. Procurement should generate
strategy options when devising a business case.
Costs and benefits: The third criterion that senior management notices is to compare the costs
and benefits of each option presented. This is called a cost-benefit analysis.
Risk assessment: Every option generated has potential risks. If these risks are not managed well,
the costs can outweigh the benefits. Therefore, senior management will look for evidence in a
business case that a risk assessment has been undertaken, and that major risk has been considered
and actioned to reduce or eliminate the risk has been identified.
Implementation plan: The final criterion that senior management will assess is whether or not
there is an implementation plan that makes sense.
LO 1, AC 1.3
Question 6: Correct
Halfords is a major bicycle and car parts retailer with long history in the market. The
suppliers are plentiful and there is no threat of forward integration. Some other smaller
retailers are applying 3D-printing technology to make personalized bicycle parts but their
market share is relatively low. Which of the following factor influences supply market the
most?

New entrants may enter the market

Rivalry within the industry

Threat of substitute

Bargaining power of buyer

 (Correct)

Explanation
In this case, Halford is a major buyer of parts, so the buyer often purchases in large volume.
Substitutes like 3D-printing technology is not yet a threat to Halford's position. Suppliers are
plentiful and relatively smaller than the buyer and the threat of forward integration is low. Thus
the bargaining power of supplier is weaker than buyer's
Then the bargaining power of buyer influences market the most.
LO 2, AC 2.2
Question 7: Correct
Which of the following problems may be identified as closed problems? Select TWO that
apply:

There are not enough data for procurement analytics

The suppliers don’t comply with the company’s policy on underage labour.

Shortage of key medicines in healthcare industry

(Correct)

A cyber attack takes down whole company’s IT system

(Correct)

Logistics costs incur a large portion in wholesale prices

Explanation
Closed problem is something happens that should not have happened. To solve this type of
problem, procurement professional should find a way to correct the situation.
In case of shortage of key medicines, procurement should find a way to increase the supply or
increase the stock.
 In case of cyber attack, procurement should find a way to recover the IT system as soon as
possible.
Otherwise, 'There are not enough data for procurement analytics' is an open-ended problem
because it prevents company to conduct procurement analytics
'Logistics costs incur a large portion in wholesale prices': In this situation, logistics costs are
hurdles that prevent companies to reach lower wholesale
'The suppliers don’t comply with the company’s policy on underage labour': In this situation,
procurement should seek ways to help supplier comply with the company's labour policy
LO 1, AC 1.1
Question 8: Correct
Which of the following activities are considered as primary activities of an organization
according to Porter's value chain? Select TWO that apply:

Picking and delivery components

(Correct)

Sourcing transportation services

Assembly design

Maintenance

(Correct)

Explanation
Primary activities consist of inbound logistics, operations, outbound logistics, sales & marketing,
service.
Second activities consist of firm infrastructure, human resource management, technology
development and procurement
 Picking and delivery components is inbound logistics.
Maintenance is an example of operations activity.
Sourcing transportation services is an activity of procurement
Assembly design is an activity in research and development (Technology)
Recruiting is an activity of human resource management

LO 2, AC 2.1
Question 9: Correct
When a procurement manager considers a substitution, the number and nature of
additional functions that substitute provides should be taken into account carefully. Which
of the following ratio could help the procurement manager to make the right decision?

Value to price ratio

(Correct)

Price to Earnings ratio


 Price to book value ratio

Return on investment
Explanation
A key factor when considering a substitution is the economics of substitution. There are three
aspects to this:
- Relative value-to-price ratio between the existing product and the substitution: Value to
price ratio is the value that a product or service provides in meeting a buyer's needs compared to
its purchase price. When considering relative value-to-price, the number and nature of additional
functions that the substitute provides should be considered carefully. Functions are not valued by
the buying organisation should not be included in the switching decision.
- The switching costs involved in moving from the existing product or service to
substitute: Switching costs are all of the costs involved for the buying organisation in moving
from one product or service to another or from one supplier to another.
- The inclination of the buying organisation to make the switch to the substitute: Buyers in
the same industry with the same understanding of relative value and price may still make
different decisions about whether to switch. This is due to differing inclination or propensities to
change.
LO 2, AC 2.2
Question 10: Incorrect
Which of the following can directly affect overhead variance? Select TWO that apply:

Wage rate per hour

Usage volume

(Correct)

Natural disasters

Monthly leasing fee

 (Correct)

Planned budget

(Incorrect)

Explanation
The cost of overheads can also create a variance from the budget and this can be split into a
volume variance and an expenditure variance:
- When overheads are apportioned to products or services a volume variance is created if
production is greater or less than the budgeted.
- Overhead expenditure variance is created when the actual overhead is greater or less than
budgeted for the level of output produced.
Usage volume is an example of volume variance, while monthly leasing fee is the example of
expenditure variance.
LO 1, AC 1.4
Question 11: Correct
Which of the following might be consequences of over-specification? Select TWO that
apply:

Having to procure an alternative

Reducing motion waste

Unfit products or services

Higher cost due to inessential features

(Correct)


 Impeding competition in supply market

(Correct)

Explanation
Main risks involved in an over-specifying requirement
• Higher cost due to incorporating features that are not required
• Impede competition in the supply market caused by the tight specification requirements
• Difficult to evaluate as there are more trade-offs to be made between the different features and
attributes in the specification
LO 3, AC 3.3
Question 12: Correct
Which of the following is the core of value analysis process?

Carry out functional analysis

(Correct)

Be creative

Develop

Gather information

Evaluate
Explanation
Here is the process for carrying out value analysis:
1. Gather information
2. Carry out functional analysis
 3. Be creative
4. Evaluate
5. Develop
Carrying out functional analysis is the core of the value analysis process. In this phase, the team
identifies the key components and determines their functions.
LO 3, AC 3.4
Question 13: Correct
When procuring a machinery, at which stage buyer must check whether that machinery is
working to the standards set out in the design specification?

Customer support

Manufacture

Installation

(Correct)

Maintenance and repair activities

Explanation
Through-life contract is the contract developed for purchase of an asset which include after sales
services up till the end-of-life of the asset.
After sales services may include the following:
• Installation and commissioning
• Operations
• Maintenance (including preventive)
• Disposal
 At installation stage, the machinery is shipped and installed on the buyer's premises and check to
ensure that it is working to the standards set out in the design specification.
LO 3, AC 3.2
Question 14: Correct
What is the type of testing that checks whether the product contains any defects which may
prevent it from working correctly?

Acceptance testing

Alpha testing

Black box testing

Functional testing

(Correct)

Explanation
Testing and acceptance include the following:
• Acceptance testing: the process to determine whether the product meets its specification
• Functional tests: the process to establish whether the product works as designed and whether it
meets customer needs
• Five types of acceptance tests:
- Alpha and beta test – alpha testing take place during the development phase and involves only
contractor employees.
- Beta testing takes place at customer’s premises
- Contract acceptance test
 - Regulation acceptance test
- Operational acceptance testing – final testing before releasing the product to customer
- Black box test (testing of software) – focuses on inputs or outputs without consideration for
internal working of the products.
LO 3, AC 3.2
Question 15: Incorrect
Apple’s CPO is planning a budget for purchasing carbon-free aluminium next year. There
are 27.4 tonnes of aluminum in stock, while Apple will need 200 tonnes for production next
year and double inventory for production in the following year. How much aluminum will
Apple need to purchase in next year?

282.2 tonnes

(Incorrect)

117.8 tonnes

172.6 tonnes

227.4 tonnes

(Correct)

Explanation
The quantity of aluminium Apple needs to buy is calculated as follows:
Quantity needed for production + the inventory needed at the end of the year - inventory at start
of the year
That formula is quantified as: 200 + 54.8 - 27.4 = 227.4
LO 2, AC 2.3
Question 16: Correct
Which of the following factors are likely to be direct barriers to a new entrant in a supply
market?


Value to price

Threat of integration

Brand identity

(Correct)

Cost advantages

(Correct)

Availability of substitutes
Explanation
The barriers to a new entrant include the following:
- Economies of scale
- Product differentiation
- Brand identity
- Capital requirements
- Access to distribution
- Cost advantages
LO 2, AC 2.2
Question 17: Correct
Which of the following specific markets engage in creation, liquidation and change of
ownership of stock?

Agriculture


Retail

Construction

Financial

(Correct)

Manufacturing
Explanation
Financial services market is extremely diverse in the type of services offered. It consists
primarily of businesses that engage in the creation, liquidation and change of ownership of
financial assets, such as shares, bonds and derivatives.
Stock is a financial asset and traded by companies in financial sector
LO 2, AC 2.1
Question 18: Correct
Total cost of ownership of a solar panel costs $5,000 and it is expected that the panel will
make a saving of $1,000 each year. So it would take 5 years to reach the payback period.
The firm also plans to keep the solar panel for at least 5 years. Is the payback period right
for making the business decision?

Yes, because it takes everything into account

Yes, because payback period shows how long the firm recovers the investment

(Correct)

No, because payback period doesn’t take into account price fluctuations


No, because payback period can be only used to calculate the depreciation of a fixed asset
Explanation
There are many factors that need to be considered when making a business decision. Costs and
benefits are among those factor. To estimate the length of time in which an investment reaches a
break-even point, businesses often use the payback period. The payback period refers to the
amount of time it takes to recover the cost of an investment.
'Yes, because it takes everything into account': It ignores the time value of money (TVM),
unlike other methods of capital budgeting such as net present value (NPV), internal rate of return
(IRR), and discounted cash flow.
'No, because payback period doesn’t take into account price fluctuations': Though it doesn't
take into account price fluctuation, payback period is still useful in financial and capital
budgeting.
'No, because payback period can be only used to calculate the depreciation of a fixed asset':
Payback period only calculates the length of time in which the benefits of a charge repay its
costs.
LO 1, AC 1.3
Question 19: Correct
Which of the following are most likely to be considered when developing specifications
based on information on the Internet? Select TWO that apply:

Information flow

Objectivity

(Correct)

Subjectivity

Methodology

(Correct)


Responsiveness
Explanation
Information gathered from the Internet should be checked and tested thoroughly to ensure it is
reliable and accurate. A useful acronym for this check is SAMOA
Source (of the information)
Audience (intended as the recipient of the information)
Methodology (used to collect and analyse the data)
Objectivity ( of the information - there should be no bias)
Accuracy
LO 3, AC 3.1
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