Why Target price in this question
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?
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
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?