Price Index, NPV, Cost Estimating Relationships, Cost Volume (MATH WEEK) Flashcards
Break-Even point is the:
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)
What are the key elements that impact the BE point?
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
Break even Capacity =
BE Capacity = Break-Even Quantity / Maximum Production Quantity
Contribution Income is:
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
Fixed Costs:
remain constant, even as activity level changes
Examples: property insurance, management salaries, rent
Variable Costs:
costs which increase or decrease with respect to each change in the activity level
Examples are raw materials, packaging and transportation, and direct labor
Semi-Variable Costs:
Variable costs - costs which increase or decrease with respect to each change in the activity level
Semi-Variable: includes a fixed and variable element
Irrational pricing strategy based on contribution income:
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.
Fixed-Price Incentive Fee (firm target) (FPIF) contract specifies the following elements negotiated at the outset:
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
Cost Plus Incentive Fee (CPIF) elements are:
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
When is a Time-and-Materials and Labor-Hour Contract used?
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.
Time & Materials (T&M) contract may be used only:
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
What are the common uses for T&M?
Installation and other support services Repair, maintenance, overhaul Evaluation of high $ repairs Over and Above A&AS (non-specific taskings)
When is a Letter Contract used?
issued by letter
when we have a contingency, emergency, or need to start production immediately
A letter contract may be used when
(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.
Performance Based Payments:
Are the preferred Government financing method when the contracting officer approves and the contractor agrees to their use
The preferred Government financing method when the contracting officer approves and the contractor agrees to their use is:
Performance Based Payments
Performance-based payments are based upon:
achievement of specific events or accomplishments that are contractually defined and valued in advance
Prior to any performance of work, aggregate of commercial ADVANCE PAYMENTS shall not exceed _____% of the contract price
15%
Commercial Advance Payment Aggregate of payments shall not exceed:
15 percent of the contract price
Arithmetic MEAN:
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)
MEDIAN:
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)
MODE:
The number in the data set that is represented most often
that occurs the most
RANGE:
(The highest # and lowest # then subtract)
The subtraction of the Minimum from the Maximum
Center:
Mean (arithmetic average), and
Median (middle value)
Shape:
Normal (mean = median), or Skew (mean ≠ median) Right Skew (tail to the right, Mean ˃ Median) Left Skew (tail to the left, mean < median)
Normal shape:
(mean = median)
Skew:
(mean ≠ median)
Right Skew:
positive, with tail pointing to the right
Mean ˃ Median
Left Skew:
negative, with the low tail to the left
mean < median
Bimodal or Multi-modal:
More than one cluster of occurrences of data values along the continuum then when graphed appears as multiple peaks of data
INCONCLUSIVE
Simple Price Index:
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
Aggregate Price Index:
Aggregate index numbers calculate price changes for a group of related items over time
Allows analysis for a group of related items
Price Index numbers measure:
the percentage of price changes over time
can indicate price changes for one or several related items or services over a period of time
Cost Plus Incentive Fee limitations are:
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
Why are performance based payments preferred over progress payments?
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
