Hello,

I have  solved question from a leading PMP book.

Your company has a cost plus incentive fee contract with the vendor. The contract has the target cost of $200,000 and a target fee set at 25% of the total. If the target price is $300,000, the share ratio  between buyer and the vendor is set at 70/30. and the actual cost of the contract is $350,000. How much does the vendor make on this contract?

solution:

Find the incentive:

Incentive= (Target cost-actual cost)x vendor share percentage

                 = (200,000-350,000)x30/100 = -$45,000

Overhead fee= target profit+incentive

                         = (0.25x200,000)+-45,000=$5000

Contract cost: actual cost+overhead fee

                            = 350,000+5000= $355,000

I have two doubts on this question:

1.  what is the use of " target price $300,000" in this question?

2. Question asked " how much does the vendor make on this contract?" . Does it mean the profit for the contractor?  In that case ; will the answer be $5000 instead of $355,000?

Kindly help