CIPS L4M5 Exam - Topic 1 Question 57 Discussion

Actual exam question for CIPS's L4M5 exam

Question #: 57
Topic #: 1

[All L4M5 Questions]

In a commercial negotiation, a procurement professional believe that the larger the order quantity from buyer, the lower the supplier's average costs. Is this assumption true?

ANo, because supplier's average costs will rise as the buyer's demand increases

BNo, because the supplier may need to invest in new facility to meet buyer's demand

CYes, because larger order quantity will bring a considerable profit to supplier

DYes, because larger order quantity will always enable the supplier to reach its economy of scale

Show Suggested Answer

Suggested Answer: B, D

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 to entry 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 and quantity 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

by Elbert at Apr 22, 2024, 09:24 PM

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Tonette

3 months ago

Larger orders can be profitable, but it depends on the supplier's capacity.

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Verona

3 months ago

Really? I’m surprised that larger orders could lead to higher costs too.

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Asha

3 months ago

Definitely agree with the idea of economies of scale!

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Carlene

4 months ago

Not always! Sometimes suppliers need to invest more to ramp up production.

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Skye

4 months ago

I think larger orders usually lower costs due to economies of scale.

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Casie

4 months ago

I’m uncertain about this one; I feel like there are factors like investment in facilities that could complicate the assumption.

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Lorriane

4 months ago

I lean towards option D because larger orders usually help suppliers reduce their average costs, but I could be wrong.

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Shawna

4 months ago

I practiced a similar question, and I feel like the supplier's costs could increase if they need to expand their operations.

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Dottie

5 months ago

I think I remember something about economies of scale, but I'm not sure if it applies in every situation.

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Nieves

5 months ago

I'm pretty confident on this one. The assumption that larger order quantities lead to lower supplier costs is generally true, as long as the supplier has the capacity to meet the increased demand.

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Kris

5 months ago

Okay, I think I've got a handle on this. The key is understanding how larger order quantities can enable suppliers to achieve economies of scale and reduce their average costs.

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Lisha

5 months ago

Hmm, I'm a bit confused on this one. I'll need to review my notes on supplier cost structures and how order quantity can impact them.

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Arlette

5 months ago

This seems like a tricky one. I'll need to think through the economics of supplier costs and economies of scale to figure out the right answer.

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Ben

5 months ago

The burndown chart shows the work remaining is decreasing at a slower rate than expected, so I think the answer is A - the Developers are doing less than they anticipated.

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Lovetta

5 months ago

This seems like a straightforward question about setting the firming time fence. I think the key is to understand the requirements - we need to firm the planned orders within the current month.

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Chau

5 months ago

Hmm, I'm a bit unsure about this one. I know a security policy covers what's being secured and who needs to follow it, but I'm not sure about the other parts. I'll have to think this through carefully.

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Lavonda

5 months ago

Wait, aren't ALL of these trying to sound tricky? I need to read each option carefully and not rush.

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Antione

9 months ago

Hah, the supplier's pet hamster eats all the profits? Now that would be a wild answer choice. But in all seriousness, I think D is the way to go here.

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Amos

9 months ago

This question is a real head-scratcher. I'm just hoping I don't get a 'trick' answer like 'the supplier's pet hamster eats all the profits' or something.

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Xuan

8 months ago

I agree with option B, investing in new facilities can increase costs

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Lashunda

8 months ago

C) Yes, because larger order quantity will bring a considerable profit to supplier

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Susana

8 months ago

B) No, because the supplier may need to invest in new facility to meet buyer's demand

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Louann

9 months ago

A) No, because supplier's average costs will rise as the buyer's demand increases

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Josphine

9 months ago

Profit is not the same as lower average costs. Just because the supplier makes more money doesn't mean their costs per unit go down. I'm going with B.

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Laurel

8 months ago

That's true, but the supplier may still need to invest in new facilities to meet the increased demand. So, I still think B is the best choice.

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Keneth

8 months ago

But wouldn't larger order quantity help the supplier reach economy of scale? I think D could also be a valid option.

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Erasmo

8 months ago

I agree with you, profit doesn't necessarily mean lower costs. B is the correct answer.

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Carey

10 months ago

I think the correct answer is D. Larger order quantities will allow the supplier to take advantage of economies of scale, which should lower their average costs.

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Lelia

8 months ago

That's true, investing in new facilities could actually increase their average costs.

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Audria

8 months ago

But what if the supplier needs to invest in new facilities to meet the demand?

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Anika

9 months ago

I agree, larger orders can help suppliers reach economies of scale.

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Jerry

11 months ago

I agree with Harley, the supplier may need to invest in new facilities to meet the demand.

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Elinore

11 months ago

Hmm, I'm not sure about this one. The supplier's average costs could actually rise if they need to invest in new facilities to meet the larger demand. But I guess it depends on the specific circumstances.

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