On April 1st, Mark the Builder entered into a contract of one-month duration to build a barn for Nick. Mark is guaranteed to receive a base fee of $4300 for his services in addition to a bonus depending on when the project is completed. Nick created incentives for Mark to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nickn 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 20% 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?

Question

Delaney Mendez

Business

25 November, 16:52

On April 1st, Mark the Builder entered into a contract of one-month duration to build a barn for Nick. Mark is guaranteed to receive a base fee of $4300 for his services in addition to a bonus depending on when the project is completed. Nick created incentives for Mark to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. Nickn 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 20% 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?

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Answers (1)

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Mercer · Answer 1

a) The expected transaction price with variable consideration estimated as the expected value is $4,773.

b) The expected transaction price with variable consideration as the most likely amount is $4,730

Explanation:

a)

Probability Total

Base Fee $4,300 Fixed $ 4,300

20% Variable consideration $860 ( = 0.2*4,300) 25% $215

10% Variable Consideration $430 ( = 0.1*4,300) 60% $258

0% Variable consideration $ - 15% $ -

Total $4,773

it is most likely that the project would be finished in 1 week earlier.

b)

Base Fee $4,300 Fixed $ 4,300

10% Variable Consideration $430 $430

Total $4,730