Why Target price in this question

 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

 

 

 What are the options given ?

it seems 300000 is a upper cap price (cilieng price)

otherwise it has no meaning.

and if it is UCP then contractor will make 

300000-350000  = -50000 (loose 50000) , no need of above calculation.

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Dear Pawar,

The options given are

 

A.$ 300,000

B.$350, 000

C. $355,000

D.$ 415, 000

 

As you said  if it is the ceiling price  the contractor will incur a loss of $ 50 000

Now I have another quetion:

 

Can we expect unnecessary information in questions like this? and if it is so , wont the answer be 5000(355 000-350 000)?