Question

Project Procurement Management Senior management at Manage Your Health, Inc. (MYH) decided that it would be best to outsource employee training on the Recreation and Wellness system, which will be rolled out soon. MYH also wants to outsource the incentive program designed to motivate employees to use the system and improve their health. MYH feels that the right outside company could get people excited about the system and provide a good incentive program. As part of the seller selection process, MYH will require interviews and samples of similar work to be presented to a review team. Recall that MYH has more than 20,000 full-time employees and more than 5,000 part-time employees. Assume that the work would involve several instructor-led training sessions, developing a training video that employees could view from the company’s intranet site, developing a training manual for the courses that anyone can download from the intranet site, developing an incentive program for using the system and improving health, creating surveys to assess the training and incentive programs, and developing monthly presentations and reports on the work completed. The initial contract would last one year, with annual renewal options. 1. Due to capacity constraints, an additional server will be required for 1 month (31day) during the development cycle. Senior management has called for a make-by analysis to determine if the equipment should be purchased or rented. The rental fee is $150 day. To purchase the equipment there is an upfront cost of $4,000 plus a daily operating cost of $75. Determine if it is more economical to buy or lease the equipment. Provide calculations and your recommendation. 2. Point of total assumption. As previously mentioned, MYH is outsourcing the development of the system. For this question, assume that a Fixed Price Incentive fee contract is being used. The target cost is estimated at 150K and the target fee is 25K. Assume the development has already occurred and the final costs came in at $225K. Because the seller’s costs came in higher than target, the seller shares in the added costs: 70% to the buyer and 30% to the seller. Calculate the final price (amount paid by the buyer) and point of total assumption. Pay attention to the ceiling. Target cost $150,000 Target fee $25,000 Target price $175,000 Ceiling Price $200,000 Actual cost $225,000 Sharing ratio 70/30

Answer 1

1) Cost if server is leased = $150 * 31 = $ 4650

Cost if server is bought = $ 4000 + (75*31) = $ 6325

As the server is required for only one month, it makes sense to lease the server rather than buying it.

2)

Target Cost = $ 150K

Target Fee = $ 25K

Final Cost = $ 225K

Extra Cost = $ 75K

Buyer's Share of Extra Cost = 70% of Extra Cost = $ 52.5K

Total Price to be paid by the buyer = $ (150K + 52.5K + 25K) = $ 227.5K

Ceiling Price = $ 200K

As the ceiling price is $ 200K, the buyer will pay a maximum of $ 200K to the seller.