Nair Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $50,000 each week that completion is delayed. Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by Probability

August 1, 2018 70%

August 8, 2018 20

August 15, 2018 5

After August 15, 2018 5

Determine the transaction price for this contract.

Question

Alexandria

Business

11 September, 05:58

Nair Corp. enters into a contract with a customer to build an apartment building for $1,000,000. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $150,000 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $50,000 each week that completion is delayed. Nair commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by Probability

August 1, 2018 70%

August 8, 2018 20

August 15, 2018 5

After August 15, 2018 5

Determine the transaction price for this contract.

+1

Answers (1)

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Jaeden Adkins · Answer 1

Answer: the weighted average contract price = $ 1077500

Explanation:

Cost of building apartments = $1000 000

Contract price + bonus x probability

Price week 1 completion (1000000 + 150000) x 70% = 805000

Price week 2 completion (1000000 + 100000) x 20% = 220000

Price week 2 completion (1000000 + 50000) x 5% = 52500

the weighted average contract price = $ 1077500

after the 3rd week Nair corp would loose the last $50 000 of the bonus