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22. Note this is the same information from #10: A contract is Fixed Price Incentive Fee....

22. Note this is the same information from #10: A contract is Fixed Price Incentive Fee. The target fee is $10,000, and the target price is $100,000. The share ratio is 80/20 and the actual cost is $85,000. The ceiling price is $110,000.

a. What is the PTA?

b. What does this mean? Be specific using your answer from 22a. (2 points)

business   Operations-Management   
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Answer #1

Here, Point of Total Assumption =( (Selling price – Target price)/share ratio of buyer)+Target Cost

a)

Or, Point of Total Assumption=((110000-100000)/0.80)+(100000-10000)=$102500

b)

Here, the amount is $102500 above this amount seller will bear all the loss due to cost overrun, the amount of cost crossing such PTA, that happens due to mismanagement, seller may not have managed the work or did not estimate cost correctly, Seller needs to monitor their actual cost against such Point of Total Assumption data and they can make sure that they are still receiving the profits.

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