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Penalty Cost Calculation

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Having problems calculating the penalty cost. Please see attached.

The U.S. Army Corps of Engineers issues purchase instructions informing potential suppliers that roadway graders will be evaluated using the following life cycle cost model:
LCC = unit operating cost, dollars
= (unit price + logistic cost) / service life

The instructions require that the selected equipment supplier demonstrates service life in a post- award reliability acceptance test. If the reliability test does not meet the level guaranteed by the contract, then a penalty function deducts from the unit price as

Penalty cost = (1- test value MTBF/quoted MTBF) * (unit price + logistic cost), where MTBF = mean time between failures, service life, hours
Logistic cost = value supplied by U.S. Army Corps of Engineers, dollars

The following bids are received:

Supplier Unit Price MTBF, Hr
A $30,000 1000
B 35,000 1200
C 60,000 1635

The buyer determines that the logistic cost is $25,000 and supplies this information to qualified suppliers. Find the winning supplier for the road equipment. Now suppose that the supplier fails to meet the quoted MTBF by 10%. What is the penalty cost and the final price for the roadway grader?

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The U.S. Army Corps of Engineers issues purchase instructions informing potential suppliers that roadway graders will be evaluated using the following life cycle cost model:
LCC = unit operating cost, dollars
= (unit price + logistic cost) / service life

The instructions require that the selected equipment supplier demonstrates service life in a post- award reliability acceptance test. If ...

Solution Summary

Word document shows the steps to calculate the penalty cost for a given set of data.

$2.19