PMP procurement question

Question posted on Simplilearn.com website: 

"Q4: A fixed-price-plus-incentive-fee (FPI) contract has a target cost of $150,000, a target profit of $30,000, a target price of $180,000, a ceiling price of $200,000, and a share ratio of 60/40. The actual cost of the project was $210,000. Calculate the final fee and the final price."

Answer posted:

"Target Cost= $150,000

Target Fee=$30,000

Target Price=$180,000

Ceiling Price=$200,000

Share Ratio=60/40(60 is for the Buyer and 40 is for the seller)

Actual Cost=$210,000

Here Actual cost is more than the target price and also higher than the ceiling price. So the seller is in trouble. Let’s see how much he gets?

Final Fee=((Target cost-Actual Cost)*Seller ratio) + Target fee=(($150,000-$210,000)*40%+$30,000=(-$60,000*40%)+$30,000= -$24,000+$30,000=$6,000

Final Price=Actual cost + Final Fee=$210,000+$6,000=$216,000. But this is more than the ceiling price. So the final price is $200,000 "

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My answer

I argue that Fee = -$10,000. That is, there is no fee to be made on the project instead the seller is paying a loss of 10k due to the price cieling of 200k and the cost being 210k.

Please correct if I am wrong.

Your answer is correct. Final price and fee would be 200K and 0 respectively.

Many people solve FPIF Q by blindly applying the PTA formula, which sometimes gives incorrect results. The PTA formula is valid only under boundary conditions.

For more info you can check complete explanation of

- Point of Total Assumption

- Fixed Price Incentive Fee Contacts

 

pmcoe's picture

may be this guide contains helpful information for you:

 

  PMP Exam Questions - The Complete Guide ✪ 

http://goo.gl/hGC7bD

Formular Study Guide:
http://goo.gl/l0RFj8