Project Management Professional (PMP) Exam Practice – Question1637

A buyer has negotiated a fixed-price-incentive-fee contract with the seller. The contract has a target cost of $200,000, a target profit of $30,000, and a target price of $230,000. The buyer also has negotiated a ceiling price of $270,000 and a share ratio of 70/30. If
the seller completes the contract with actual costs of $170,000, how much profit will the buyer pay the seller?


A. $21,000
B. $35,000
C. $39,000
D. $51,000

Correct Answer: C

Explanation:

Explanation:
To calculate the fee that the buyer must pay, actual costs are compared with the target cost. If actual costs are less than the target cost, the seller will earn profit that is additional to the target profit. If actual costs are more than the target cost, the seller will lose
profit from the target profit. The amount of profit is determined by the share ratio (with the buyer’s share listed first). In this example, the seller is under target cost by $30,000. That amount will be split 70/30. So the buyer keeps $21,000, and the seller receives an
additional $9,000 added to the target profit, which is
the incentive. Total fee is $39,000.