A contractor is working under a cost-plus contract with a 15% fee. If the total allowable project costs are $240,000, what is the contractor's total compensation?
Correct Answer
D) $276,000
Under a cost-plus contract, the contractor receives reimbursement for allowable costs plus a fee. Total compensation = $240,000 + ($240,000 × 0.15) = $240,000 + $36,000 = $276,000.
Why This Is the Correct Answer
In a cost-plus contract, the contractor receives two components: reimbursement for all allowable project costs plus an additional fee (profit margin). The fee is calculated as a percentage of the allowable costs. Since the allowable costs are $240,000 and the fee is 15%, the contractor receives $240,000 + ($240,000 × 0.15) = $276,000 total compensation.
Why the Other Options Are Wrong
Option B: $240,000
This represents only the allowable costs without including the contractor's fee. In a cost-plus contract, the contractor must receive compensation above the actual costs.
Option C: $255,000
This represents 25% above costs ($240,000 × 1.25), which would be the answer if the fee were 25% instead of the given 15%.
Memory Technique
Remember 'Cost-PLUS' means costs PLUS something extra (the fee). Think 'C + P' = Costs + Percentage fee.
Reference Hint
Look up contract types and cost-plus contracts in the Business and Finance section, typically Chapter 4 or 5 covering contract administration and pricing methods.
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