Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract

Question

Pepper

Business

1 May, 17:17

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract

+3

Answers (1)

Know the Answer?

Dorian Reed · Answer 1

The transaction price that Guarder will estimate for this contract is $40,500

Explanation:

In order to calculate what transaction price will Guarder estimate for this contract Assuming that Guarder determines the transaction price as the expected value of consideration, we would have to calculate the expected value of expected consideration as follows:

expected value of expected consideration=Fixed Fee + Additional Income

expected value of expected consideration=$35,000 + ($10,000*55%)

expected value of expected consideration=$35,000+$5,500

expected value of expected consideration=$40,500

The transaction price that Guarder will estimate for this contract is $40,500