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In: Operations Management

In a cost-plus-incentive-fee contract, a buyer and a seller agreed on a target cost of $7,000,...

In a cost-plus-incentive-fee contract, a buyer and a seller agreed on a target cost of $7,000, and a fixed fee of $1,000. Any cost overruns or underruns will be shared between the buyer and the seller by 50% and 50%, respectively. When the actual cost of $8,000 is incurred, how much will the supplier get paid in total?

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Expert Solution

Target cost: 7000

Fixed fees: 1000

Actual cost: 8000 (Hence total overrun: 1000 more than the target cost)

Overruns are to be shared 50:50. Hence, $1000 to be shared between the buyer and the seller in the amount of $500 each

Therefore, total amount that the supplier shall get is Target cost+Fixed fees+Overruns= 7000+1000+500=$8,500

Hence the supplier shall be paid $8,500.

keosha answered 2 years ago
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