A Drawback of Short-Term Contracting as an Alternative to Making

question 14

Multiple Choice

A drawback of short-term contracting as an alternative to making a component in-house is that

• A) it is the most-integrated alternative to performing an activity so the principal company has no control over the agent.
• B) the supplying firm has no incentive to make any transaction-specific investments to increase performance or quality.
• C) it fails to allow a long planning period that individual market transactions provide.
• D) the buying firm cannot demand lower prices due to the lack of a competitive bidding process.

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Definitions:

Square Feet

A unit of area measurement equal to a square measuring one foot on each side.

Maintenance Cost

Maintenance Cost involves expenses incurred to keep assets, equipment, or property in optimal condition and operating efficiently, including repairs and preventive care.

Administrative Costs

Overhead expenses associated with the day-to-day running of a business, involving clerical activities, and support services not linked directly to production.

Service Department Expenses

Costs incurred by the departments that support the primary activities of a business but do not directly engage in production.