Price Index, NPV, Cost Estimating Relationships, Cost Volume (MATH WEEK)

Question 1

Break-Even point is the:

Answer 1

Quantity at which total revenue equals total cost

Profit is “zero”

It gives the firm a picture of risk - how many do I have to sell before I actually earn a profit?

R = Total Cost + Profit
R = Total Cost + $0
Ru (Q) = F + Vu (Q)

Question 2

What are the key elements that impact the BE point?

Answer 2

Fixed costs, variable costs, selling price

Market variables

• Excess capacity
• Shift in market supply and demand
• Learning curve, capital investment
• Overall health of the economy
• Accounting for fixed costs

Question 3

Break even Capacity =

Answer 3

BE Capacity = Break-Even Quantity / Maximum Production Quantity

Question 4

Contribution Income is:

Answer 4

CI = Revenue minus Variable Cost

CI  =  R - VC
CI  =  Ru (Q) - Vu (Q)
CI  =  (Ru - Vu) (Q)

Revenue beyond variable costs is “contributed” to fixed costs

Revenue beyond variable and fixed costs is “contributed” to profit

Typically, CI is calculated on a per-unit level, as well as a total quantity level

Question 5

Fixed Costs:

Answer 5

remain constant, even as activity level changes

Examples: property insurance, management salaries, rent

Question 6

Variable Costs:

Answer 6

costs which increase or decrease with respect to each change in the activity level

Examples are raw materials, packaging and transportation, and direct labor

Question 7

Semi-Variable Costs:

Answer 7

Variable costs - costs which increase or decrease with respect to each change in the activity level

Semi-Variable: includes a fixed and variable element

Question 8

Irrational pricing strategy based on contribution income:

Answer 8

CI = (Ru - Vu) (Q)
CI  =  ($25  -  $30) (4,500) Revenue is less than variable

Example: (Ru-Vu) or (30-3308)

Revenue does not cover variable costs

THINK: if this offer is irrational, what is the lowest price you would be willing to pay?

Answer: Selling price should be equal to or greater than the variable costs. Otherwise, offer should be considered irrational.

Question 9

Fixed-Price Incentive Fee (firm target) (FPIF) contract specifies the following elements negotiated at the outset:

Answer 9

Target cost
Target profit
Ceiling price
Profit adjustment formula

Final cost less than the target cost results in a final profit greater than the target profit

Final cost more than target cost results in a final profit less than the target profit, or even a net loss

Because profit varies inversely with the cost, this contract type provides a positive, calculable profit incentive for contractors to control costs

Question 10

Cost Plus Incentive Fee (CPIF) elements are:

Answer 10

Elements:

• Target Cost/Target Fee
• Sharing Formula
• Minimum Fee/Maximum Fee

Government pays allowable cost and incentive fee
Incentive fee determined by comparing actual costs to target costs and adjusting target fee IAW fee adjustment formula (share ratio)

Application: Where a profit incentive is likely to provide motivation for more effective management

Question 11

When is a Time-and-Materials and Labor-Hour Contract used?

Answer 11

Used when not possible to estimate the extent, duration and cost of the work to any reasonable degree of confidence

Least preferred contract type because T&Ms are considered high risk because contractor’s profit is tied to the number of hours worked. Thus, the government bears the risk of cost overruns.

Question 12

Time & Materials (T&M) contract may be used only:

Answer 12

When it’s not possible at the time of placing the contract to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence and

Only if
CO prepares a D&F that “No other contract type is suitable” and
Contract includes a Ceiling Price that contractor exceeds at their own risk

Question 13

What are the common uses for T&M?

Answer 13

Installation and other support services
Repair, maintenance, overhaul
Evaluation of high $ repairs
Over and Above
A&AS (non-specific taskings)

Question 14

When is a Letter Contract used?

Answer 14

issued by letter

when we have a contingency, emergency, or need to start production immediately

Question 15

A letter contract may be used when

Answer 15

(1) the Government’s interests demand that the contractor be given a binding commitment so that work can start immediately and
(2) negotiating a definitive contract is not possible in sufficient time to meet the requirement. However, a letter contract should be as complete and definite as feasible under the circumstances.

Question 16

Performance Based Payments:

Answer 16

Are the preferred Government financing method when the contracting officer approves and the contractor agrees to their use

Question 17

The preferred Government financing method when the contracting officer approves and the contractor agrees to their use is:

Answer 17

Performance Based Payments

Question 18

Performance-based payments are based upon:

Answer 18

achievement of specific events or accomplishments that are contractually defined and valued in advance

Question 19

Prior to any performance of work, aggregate of commercial ADVANCE PAYMENTS shall not exceed _____% of the contract price

Answer 19

15%

Question 20

Commercial Advance Payment Aggregate of payments shall not exceed:

Answer 20

15 percent of the contract price

Question 21

Arithmetic MEAN:

Answer 21

Calculated by adding all the numbers together and diving by the number of values

Sum of the values in a set of numbers divided by the number of values (observations) in that set

Sum of the observations divided by the number of observations.

(Ranked, added together, divided for average, average = mean)

Question 22

MEDIAN:

Answer 22

The middle value, or the average of the middle two if an even number of observations, after rank ordering the observations.

The middle value in a set of numbers listed in rank order. If there is an even number of values, the median is the mean of the two middle numbers.

For an even number of observations – the sum of the middle two values divided by two (2)

50% of the observations are above the median and 50% are below the median

When equal to the arithmetic mean, the distribution is often called “normal” (aka – the bell shaped curve)

The middle # after it has been ranked

(If even #s, add together the 2 in the middle and divide by 2)

Question 23

MODE:

Answer 23

The number in the data set that is represented most often

that occurs the most

Question 24

RANGE:

Answer 24

(The highest # and lowest # then subtract)

The subtraction of the Minimum from the Maximum

Question 25

Center:

Answer 25

Mean (arithmetic average), and

Median (middle value)

Question 26

Shape:

Answer 26

Normal (mean = median), or 
Skew (mean ≠ median)
Right Skew (tail to the right, Mean ˃ Median)
Left Skew (tail to the left, mean <  median)

Question 27

Normal shape:

Answer 27

(mean = median)

Question 28

Skew:

Answer 28

(mean ≠ median)

Question 29

Right Skew:

Answer 29

positive, with tail pointing to the right

Mean ˃ Median

Question 30

Left Skew:

Answer 30

negative, with the low tail to the left

mean < median

Question 31

Bimodal or Multi-modal:

Answer 31

More than one cluster of occurrences of data values along the continuum then when graphed appears as multiple peaks of data

INCONCLUSIVE

Question 32

Simple Price Index:

Answer 32

Simple index numbers calculate price changes for a single item over time

Index numbers are more accurate of they are constructed using actual prices paid for a single commodity, product or service rather than the more general aggregated index

Question 33

Aggregate Price Index:

Answer 33

Aggregate index numbers calculate price changes for a group of related items over time

Allows analysis for a group of related items

Question 34

Price Index numbers measure:

Answer 34

the percentage of price changes over time

can indicate price changes for one or several related items or services over a period of time

Question 35

Cost Plus Incentive Fee limitations are:

Answer 35

Adjustment in fees is limited by minimum and maximum fee negotiated.

Appropriate for services or development and test programs when Cost-reimbursement contract is necessary

Target cost and fee adjustment formula can be negotiated that are likely to motivate the contractor to manage performance effectively

Question 36

Why are performance based payments preferred over progress payments?

Answer 36

Progress payments require adequate contractor system controls:

Determine and document the contractor’s overall capability to perform. Theevaluation includes financial capability, adequacy of accounting system and controls, past performance, experience, quality of management, and reliability

Are administratively burdensome!

Performance-based payments are the preferred method of Government contract financing for fixed-price contracts

Using performance-based payments should result in lower administrative costs than progress payments based on cost