Procurement Management PMP Questions

Hi there. In this video, we are going to walk through some procurement management questions for your PMP exam. So in particular, in this video, we are going to focus on the math section of the procurement management. So we're going to walk through how to calculate buy release and procurement contracts. So let's get started. Our first question is. Ada's trying to decide whether to lease or buy an item for her project. The daily lease cost is $150. To purchase the item, the investment cost is $2,000 and the daily cost is $50. In how many days will the lease cost be equal to the purchase cost? So at this point, feel free to pause this video and calculate this question. If you calculated B, then you got this question correct. Let's look at how we arrive at the answer. So first of all, we want to get to a point where the cost of leasing this product is equal to the cost of buying this product. So essentially what we have is 150x is, is how much it would cost on a daily basis to lease this product, and how much it costs cost to purchase this product is our upfront cost of $2,000 plus our daily cost of $50, so 50 times x, where x represents the number of days. So now once we have our equation written out, then we have to solve for x. So if we move all of the x's to the left-hand side, then we get 150x minus 50x, which is 100x, which is equal to 2,000. And if we move the 100 to the On the other side of the equation, we get 2,000 divided by 100, and this tells us that x equals 20 days. Our next question is also a rent or buy style of question, so it's quite similar to the one that we just covered. And let's see if you can get the right answer for this one. Rent-A-Computer Inc. will rent Lisa a computer for $200 per day. Best Buy will lease it to her for a down payment of $750 plus $50 per day. When will the cost of renting and leasing become the same? Is it 5 days, 8 days, 9 days, or 12 days? So feel free to pause the video again and calculate your answer. If you said A, 5 days, then you are correct. And now let's look at how we derive at this answer. So let's, let's suppose that n is equal to the number of days, and we want to get to a point where leasing and renting equals the same amount. Now to get how much it costs to rent, our equation is 200 times n, or 200 times the number of days. And to get the cost for leasing, the equation that we have is 750 down payment plus 50 times n, where n is the number of days. So now that we have our equation, we just need to solve for n. So the first thing we do is put all of the values with n to the left-hand side and all the values without n on the right-hand side. So when we solve for n, we have 200 times n minus 50n, which gives us 150n equals 750. So to calculate n, what we do is we use 750 divided by 150. 150, and that gives us the answer of 5. So after 5 days, the cost of renting and leasing will equal the same amount. Let's now move on to our 3rd question. This question is about cost reimbursable contracts. So let me read the question to you. A cost reimbursable contract has an estimated cost of $15,000. If the seller beats the cost, they will share the savings, 75% to the buyer and 25% to the seller. If the actual cost comes in at $12,000, what is the final price? So is it A, $12,500, B, $12,750, C, $12,250, or D, $12,000? So at this point, feel free to pause the video again, calculate out the right answer, and then play the video. If you put B, $12,750, you are correct. Now let's see how we get to this correct answer. Before you do any calculation questions for your PMP exam, it's important before you start to list out all of your variables before you plug it into a formula so you can visually see what information you're In this case, what you know is that the target price is equal to $15,000. The actual cost of the contract is— or the actual cost of the project is $12,000. And what you also know is the share ratio for the buyer and seller is 75/25. So before we even just try to manually plug these numbers into a formula, let's try to understand what this means. The reason that the buyer wants to have a share ratio is that They want to give the seller an incentive to come below the target price of the contract so that they can both create a win-win situation. So the buyer is saving money and the seller is getting more money from coming below the actual cost, right? So because the actual cost here is $12,000 and the buyer would have been happy to finish this project at $15,000, what the buyer is saying to the seller is that, hey, if you come in at $12,000, I'll give you 25% of the amount of money that you saved me. So in this case, the seller saved the buyer $3,000. So that's the difference between $15,000 minus $12,000. And out of that $3,000 saving, 75% of that would go to the buyer and 25% of that would go to the seller. So 25% of $3,000 is $750. So that's what this question is asking you. Now, the actual cost to the buyer would be equal to the $12,000, so that's the actual cost of the project, plus the incentive fee that they're paying to the seller in order to incentivize them to come below the estimated cost of the cost reimbursable contract. So again, to calculate the seller's incentive fee, what you do is you use the difference between the target price minus the actual price, in this case $15,000 minus $12,000, which is $3,000, times the seller's share, which is 25% in this case. And when you work out the math, you get $12,750. And for some further reading— and these links will also be included in the show notes for this video— you can check out the 2 links Now let's move on to our next question. The contract is expected to cost $280,000. Actual costs are $240,000. There is a 50/50 share for any cost savings. What is the actual value of the contract? So again, feel free to pause this video, work out the math, and then play when you're ready. If you put B as the correct answer, then you got this correct. Now let's look at how we came to this answer. So again, whenever you have a calculation question on your PMP exam, what you want to do is list out all of the values that you're given before you do any calculations. So in this question, what we know is that the target value of this contract is $280,000. The actual cost is $250,000. $40,000, and the share ratio between the buyer and the seller is 50/50. So similar to the first question here, the cost— total cost of the contract is how much the buyer is going to end up paying. So by giving the seller this incentive of 50/50, the seller has incentive to come below the actual cost of the contract, which will mean that the buyer will pay less overall and the seller will get more profits from doing this contract. So it's really a win-win scenario, and they split that savings, the savings of the contract, 50/50. So now let's look at the math. So the actual cost for the buyer is $240,000. They have to pay that, and they also have to pay the incentive that they're giving to the buyer. In this case, it's the difference between the target value and the actual value times 0.5, or Divided by 2. So in this case, it will be $280K minus $240K divided by 2. And the reason you can divide it by 2 is because they're sharing the savings 50/50. Another way of thinking about this is multiplying by 0.5, and the answer you get is $260K. And for the last question we're going to walk over, it's another buy or lease question. So you are considering whether to buy or lease a machine for your heavy engineering plant. Your finance department has provided you with the following data. The cost of buying the machine is $29,000, and the one-time cost for procurement and integration is $1,000. The cost of leasing the machine involves $10,000 as down payment and $5,000 per month as license fee. What is the break-even duration after which buying of the machine Is it after 4 months, 3 months, 5 months, or do you not have enough information to determine the right answer? Again, feel free to pause this video, calculate the right answer, and then play it again. If you put 4 months, then you got it correct. Let's look at how to come to the correct answer. So when you're calculating any buy or lease question, what you're really calculating is the break-even point where Buying is equal to the cost of leasing. So what you want to do is write the equation for the cost of buying and then the cost of selling. So the cost of buying this machine would be $29,000 plus the one-time fee of integration, which is $1,000. The cost of leasing the machine would be this one-time down payment of $10,000 plus $5,000 $5,000 per month, so $5,000m. Now we just have to solve for m. So how many months would it take for buying and leasing to equal? So what we want to do is move every— all the equa— all the variables without m to one side of the equation, and all the variables without m on the other side— with m, sorry, on the other side of the equation. And when we solve for m, what we get to is 4 months. And that's how we determine that after 4 months both options would be equal. So I hope you learned a lot from this video. Make sure you give it a thumbs up, and I'll see you in a future video. Thank you.