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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 $5,200 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

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yemmy

Answer:

$6,097

Explanation:

Expected transaction price with the variable consideration estimated as the expected value

The question can be summarized as follows:

Duration                                    Pay                                         Probability

Normal                                      $5,200                                   1

finish 2 wks early                     25% more                               25% or 0.25

finish 1 wk early                        20% more                               55% or 0.55

Now

At Normal Duration,

Total Pay = Pay x Probability = $5,200 x 1 = $5200

At finish 2 wks early (25% variable consideration),

additional pay = $5,200 x 25%

                        = $5,200 x 0.25

                        = $1,300

Total pay (at 25% probability) = $1,300 x 0.25 = $325

At finish 1 wk early (20% variable consideration)

Additional pay = $5,200 x 20%

                        = $5,200 x 0.20

                        = $1,040

Total pay (at 55% probability) = $1,040 x 0.55 = $572

At finish (10% variable consideration)

Additional pay = $5,200 x 10%

                        = $5,200 x 0.1

                        = $520

Total pay (at 0% probability) = $520 x 0 = $0

Hence,

the expected transaction price with the variable consideration estimated as the expected value

Grand total = $5,200 + $325 + $572 + 0

                   = $6,097

Answer:

Expected Transaction Value = $6,097

Explanation:

Base Fee = $5,200

Incentives                      

Two weeks early  

$5,200*25%* 25% = $325 expected bonus

One week early

$5,200*20%*55% =  $572

Probability must be = 1 or 100%

known probability = 25%+55% = 80%

Balancing probability = 20% with $0 incentive and condition for it to be a valid variable to consider therefore expected revenue on it is $0  

Therefore EXPECTED TRANSACTION VALUE = $5,200 + 325+572

                                                                             $6,097

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