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 $4,000 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 20% 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 55%.What is the expected transaction price with variable consideration estimated as the expected value?
a. $4,750
b. $5,000
c. $5,750
d. $5,500

Answer 1

Answer:

$4,690

Note: The correct answer is $4,690 as calculated below based on the information provided but it is not included in the option. Kindly confirm this from your teacher.

Explanation:

This can be calculated using as follows:

Expected value of finishing = Base fee * Additional percentage * Probability of finishing

Therefore, we have:

Expected value of finishing 2 weeks early = $4,000 * 25% * 25% = $250

Expected value of finishing a week early = $4,000 * 20% * 55% = $440

As a result, we have:

Expected transaction price = Base fee + Expected value of finishing 2 weeks early + Expected value of finishing a week early = $4,000 + 250 + 440 = $4,690.

Therefore, the expected transaction price with variable consideration estimated as the expected value is $4,690.