Analytical Questions from Procurement Management Knowledge Area

Analytical Questions from Procurement Management Knowledge Area

In this blog, we will discuss few analytical questions from the Procurement Management knowledge domain in PMP exam, to make you understand the logic behind easy calculation.

Q1. A cost-plus-incentive-fee (CPIF) contract has an estimated cost of $150,000 with a predetermined fee of $15,000 and a share ratio of 80/20. The actual cost of the project is $130,000. How much profit does the seller make?

1. $31,000
2. $19,000
3. $15,000
4. none of the above

Ans:  Estimated Cost = $150,000

Predetermined fee = $15,000

Share Ratio = 80/20; where 80 is for the Buyer and 20 for Seller

Actual Cost = $130,000

Saving = Estimated Cost - Actual cost = $20,000 ($150,000 - $130,000)

Seller profit = Predetermined fee + (Share ratio of seller * Savings) = $15,000 + (20% * $20,000) = $19,000

Q2. A fixed-price-plus-incentive-fee (FPI) contract has a target cost of $130,000, a target profit of $15,000, a target price of $145,000, a ceiling price of $160,000, and a share ratio of 80/20. The actual cost of the project was $150,000. How much profit does the seller make?

1. $10,000
2. $15,000
3. $0
4. $5,000

Ans: Target Cost = $130,000

Target Fee = $15,000

Target Price = $145,000

Ceiling Price = $160,000

Share Ratio = 80/20

Actual Cost = $150,000

Here, the actual cost is less than the ceiling price and is more than the target cost.

Final Fee = ((Target cost - Actual Cost) * Seller ratio) + Target fee

      = (($130,000-$150,000) * 20%+$15,000

      = (-$20,000 * 20%) + $15,000

      = -$4,000 + $15,000

      = $11,000

Final Price = Actual cost + Final Fee

        = $150,000 + $11,000

        = $161,000.

But final price is more than the ceiling price which is $160,000.

So, the final price which the seller gets is $160,000.

Therefore, the profit that seller gets is $160,000 - $150,000 = $10,000

Q3. A cost-plus-percentage-cost (CPPC) contract has an estimated cost of $120,000 with an agreed profit of 10% of the costs. The actual cost of the project is $130,000. What is the total reimbursement to the seller?

1. $143,000
2. $142,000
3. $140,000
4. $132,000

Ans: Estimated Cost = $120,000

Actual Cost = $130,000

Agreed Profit = 10%

Reimbursement amount = Actual cost + % profit of actual cost = $130,000 + (10% of $130,000) = $143,000

Q4. A Cost-plus-incentive-fee (CPIF) contract has an estimated cost of $210,000, a fee of $25,000, and a share ratio of 80/20. The actual cost of the project was $200,000. Calculate the final fee and the final price.

Ans: Estimated Cost = $210,000

Predetermined fee = $25,000

Share Ratio = 80/20

Actual Cost = $200,000

Saving = Estimated Cost - Actual cost = $10,000 ($210,000 - $200,000)

Final Fee = (Saving * Seller Ratio) + Predetermined fee

                 = ($10,000 * 20%) + $25,000

                 = $2,000 + $25,000

                 = $27,000

Final Price = Actual cost + Final Fee = $200,000 + $27,000 = $227,000

Q5. 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.

Ans: Target Cost = $150,000

Target Fee = $30,000

Target Price = $180,000

Ceiling Price = $200,000

Share Ratio = 60/40; where 60 is for the Buyer and 40 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 final price is more than the ceiling price.

Therefore, the final price is $200,000.

Q6. A fixed-price-plus-incentive-fee (FPI) contract has a target cost of $9,000,000, a target profit of $850,000, a ceiling price of $12,500,000, and a share ratio of 70/30. The actual cost of the project was $8,000,000. Calculate the final fee and the final price.

Ans: Target Cost = $9,000,000

Target Fee = $850,000

Target Price = $9,850,000

Ceiling Price = $12,500,000

Share Ratio = 70/30

Actual Cost = $8,000,000

Here actual cost is less than the target price and also lesser than the ceiling price.

Let us see how much the seller get?

Final Fee = ((Target cost - Actual Cost) * Seller ratio) + Target fee

     = (($9,000,000 - $8,000,000) * 30% + $850,000

     = ($1,000,000 * 30%) + $850,000

     = $300,000 + $850,000

     = $1,150,000

Final Price = Actual cost + Final Fee = $8,000,000 + $1,150,000 = $9,150,000.