Final answer:
The actual profit received by the seller under the FPIF contract is $32,000, calculated by sharing the cost overrun as per the 60/40 ratio. The actual price of the contract after completing the work is $472,000, determined by adding the actual profit to the final cost.
Step-by-step explanation:
The scenario described involves an FPIF (Fixed Price Incentive Fee) contract. To calculate the actual profit received by the seller and the actual price of the contract, certain calculations need to be done. The target cost is initially set to $420,000 with a target profit of $40,000, resulting in a target price of $460,000. The ceiling price is capped at $525,000 with a share ratio of 60/40.
Since the contractor completed the contract at $440,000, which is $20,000 over the target cost, this overrun is shared between the buyer and seller according to the share ratio. Therefore, the seller is responsible for 40% of the cost overrun. This means:
Cost overrun: $440,000 - $420,000 = $20,000
Seller's responsibility (40% of overrun): 40% of $20,000 = $8,000
Adjusted profit: $40,000 (target profit) - $8,000 (seller's share of overrun) = $32,000
The actual profit for the seller is then $32,000. To determine the actual price of the contract:
Actual Price: $440,000 (final cost) + $32,000 (actual profit) = $472,000
Therefore, the actual price paid for the contract is $472,000