Question

On April 1st, Bob the Builder entered into a contract of one-month duration to build a barn for Nolan. Bob is guaranteed to receive a base fee of $5,800 for his services in addition to a bonus depending on when the project is completed. Nolan created incentives for Bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nolan offered to pay an additional 25% of the base fee if the project finished 2 weeks early and 15% if the project finished a week early. The probability of finishing 2 weeks early is 25% and the probability of finishing a week early is 60%. a) What is the expected transaction price with variable consideration estimated as the expected value?
b) What is the expected transaction price with variable consideration as the most likely amount?

Answer 1

Answer:

a) What is the expected transaction price with variable consideration estimated as the expected value?

• original cost $5,800 if job is finished in one month (15% probability)
• bonus price for finishing 2 weeks earlier $5,800 x 1.25 = $7,250 (25% probability)
• bonus price for finishing 1 week earlier $5,800 x 1.15 = $6,670 (60% probability)

expected transaction price = ($5,800 x 15%) + ($7,250 x 25%) + ($6,670 x 60%) = $6,684.50

b) What is the expected transaction price with variable consideration as the most likely amount?

$6,670, since it has a 60% probability