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Answers to supplementary objective test questions

CHAPTER 2 – THE MODERN BUSINESS ENVIRONMENT

2.1 D

2.2 Prevention: The cost of implementing a system to prevent defects before they
can actually occur.

Appraisal: The costs of inspection and testing.

Internal Failure Costs: Costs from a failure. However, this failure is found before
the product is presented to the customer.

External Failure Costs: Costs from a failure. However, this failure is found by
the customer.

2.3 D

BPR should not be seen as a mere cost cutting exercise although long term
savings may well result through improved processes. The important point is that
it is not a one-off, so III is wrong. BPR is a radical rethink, so it is much more
than small incremental changes – this sounds more like Kaizen.

BPR is often driven by environmental changes and does require a strategic
outlook, so IV is correct. It is also often the case that complex organisations are
made much simpler by 'delayering' or removing unnecessary activities.

2.4 Options (iii) and (iv) are correct.

The throughput = Selling price – material costs. Since selling price is $30 and
the throughput is $12, material costs are $18. Since the product also requires
labour and variable overheads, the total variable cost must be higher than
$18 so option 1 is wrong.

The return per factory hour is throughput per unit/product time in bottleneck
resource which is 12/(5,600/700) = 12/8 = $1.5 so option 2 is wrong.

The cost per factory hour is total factory cost/total time on bottleneck =
$3,920/5,600 = $0.7 so option 3 is correct.

The throughput accounting ratio is return per factory hour/cost per factory hour
=$1.5/$0.7 which is greater than 1 so option 4 is correct.

Management should be aiming to maximise the throughput accounting ratio so
option 5 is wrong.

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