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Using the data shown: TARGET COST: 12,000, TARGET FEE: 1000, SHARE RATION: 80/20 and PRICE CEILING: 14,000. The point of total assumption occurs at a cost of:
Correct Answer: C
The Point of Total Assumption (PTA) is related to Fixed Price Incentive contracts. It is the point at which seller assumes 100% of the cost overruns (just before the ceiling price is reached). At this point, Actual Cost plus Actual Fee equals to the Ceiling Price. It is the point where a FPIF contract turns into a Firm Fixed Price contract, because at this point the profit the seller will make equals what he/she has already spent on it. So, the only way to make money is to continue with the project. PTA = Target Cost + (Ceiling Price - Target Price) / Buyer's Share Target Cost = 12000 Target Fee = 1000 Target Price = 12000 + 1000 = 13000 Ceiling Price = 14000 Buyer's ratio = 80% PTA = 12000 + (14000 13000)/0.8 = 13250. So, answer is (C).[Check this way...] When Actual Cost = 13250, cost overrun is 13250 12000 = 1250. So Incentive (actually penalty) = -1250 * 0.20 = -250 and Net Fee = 1000 250 = 750. Hence, Actual Price =13250 + 750 = 14000. This is also equal to Ceiling Price.