TOPIC: PTA Calculations

Hi,

Can anyone help me understand the calculations behind this question?
I used the Point Of Total Assumption formula but did not get the answer right!

A fixed-price-plus-incentive-fee (FPI. contract has a target cost of $130,000, a target profit of $15,000, a target price of $145,000, a ceiling price of $160,000, and a share ratio of 80/20. The actual cost of the project was $150,000. How much profit does the seller make?

a) $10,000
b) $15,000
c) $0
d) $5,000


Thanks for your help!

Let me try...

First, I believe, you can do this WITHOUT any formual....

target cost of $130,000,
target profit of $15,000
target price of $145,000
ceiling price of $160,000
share ratio of 80/20
actual cost of the project was $150,000


actual cost is 150K. i.e 20K more than the target cost. Now for this 20K, buyer is going to pay ONLY the buyer share.... i.e 80% of 20K = 16K

so total buyer would pay= target cost + share + target profit = 130k+16K+15K = 161K (NOW... this is MORE than ceiling... so of course, buyer pays only 160K)-

so final profit = 160K that the seller received minus cost of 150K = 10K

-
We can do this using PTA as well, though that would be more convoluted.. let me think if I can use PTA and show the answer....

trying using PTA-

PTA = ((celing - target-price)/buyer-share ) + target-cost

PTA = ((160k - 145k)/0.8 ) + 130 == 148,750.

PTA is 18,750 more than target cost. So of 18,750, seller has to share 20% of the burden i.e $3750. This reduces his profit by this amount.

After PTA, any cost is seller's cost. Actual cost is 150,000. So another $1250 seller has to bear the burden, all from his/her pocket.

Final profit = 15,000 - ($3750 seller share) - ($1250 seller full after pta)

= 10K

Thanks Amit!
The calculations really helped.
I guess I was not substracting the final amouunt (burden) for the seller.

Thanks again!

good question and good answers!
PTA is a somewhat "new" concept that from what i heard, is under the consideration of PMI to add PTA into its content in the future editions of PMBOK.

however, I have heard from numerous of my students that at least 3-5 questions were on PTA for edition 4 and also edition 5 exams. i personally did not receive any of the PTA questions but i would still recommend to prepare for it.

in addition, i had feedbacks on questions regarding TCPI, not just asking for its formula (as in edition 4 exams). HeadFirst has a good explanation on the application of TCPI, which i would recommend learning it for the exam, whether it might be part of the "uncounted" questions or not, it's better to be prepared than not to be!

That is a great point, Jenna. I took the 5th edition of the PMP Exam and I did not encounter any questions that required me to calculate PTA during the exam. However, I did receive 1 or 2 questions that required me to understand the general concept of PTA and when it is used. I think it's very important to understand the underlying concepts of PTA, as well as the basic formula and calculations that are needed to properly execute the calculation during the exam. After all, it is probable that one will receive anywhere from 1-4 questions pertaining to PTA and that could be anywhere from 1-2% of one's total points earned on the exam.

im not understand the 1250 from where come , so please more clarification for 1250

adel wrote: im not understand the 1250 from where come , so please more clarification for 1250

Hi Adel,

As Amit mentioned, After PTA, any cost is seller's cost. Actual cost is 150,000.
So the seller has to bear an additional cost of Actual Cost - PTA = 150,000-148,750 = 1,250
So another $1,250 seller has to bear the burden, all from his/her pocket.

Hope this clarifies it.

Seems like a lot of calculations to remember and then apply. When taking mock exams I find that if I am not solid on the formulas I lose my concentration and focus. So I will have to really review these areas well to feel solid. Any suggestions? Are those of you who do well in finance or what background that makes it easier for you. I am better at statistics than these financial type of equations. Good discussion.