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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

The buyer pays: actual cost + fixed fee + seller’s share ratio * (target cost - actual cost)

The buyer pays = $8,000 + $1000 + 50% * ($7,000 - $8,000)

= $8000 + $1000 - $500

= 8500 supplier pay = fixed fee + incentive bonus

= $1000 + (-$500)

= $500

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keosha answered 2 years ago
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