Question

Mark Heun, president of Concrete Always, agrees to construct a concrete cart path at Dakota Golf Club. Concrete Always enters into a contract with Dakota to construct the path for $212,000. In addition as part of the contract, a performance bonus of $42,400 will be paid based on the timing of completion the performance bonus will be paid fully if completed by the agreed-upon date the performance bonus increases by $10,600 per week for every week be on the agreed-upon completion date Mark has been involved in a number of contracts that have performance bonus as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Mark estimates, givrn the constraints of his schedule related to the other jobs that there is a 55% probability that he will complete the job on time, a 30% probability that he will be one week late and a 15% probability that he will be two weeks late.

Determine the transaction price that Conrete Always should compute for this agreement.

Answer 1

To compute the transaction price, calculate the expected performance bonus using the provided probabilities of completion and sum it with the contract price. The calculation gives an expected performance bonus of $48,760 and a transaction price of $260,760 for Concrete Always's contract with Dakota Golf Club.

Step-by-step explanation:

To determine the transaction price for the agreement between Concrete Always and Dakota Golf Club, it is necessary to calculate the expected performance bonus using probability estimations provided by Mark Heun, the president of Concrete Always. The formula to calculate the transaction price is:

Transaction Price = Contract Price + (Probability of On Time Completion x On Time Bonus) + (Probability of One Week Late x One Week Late Bonus) + (Probability of Two Weeks Late x Two Week Late Bonus)

Given the data:

• Contract Price = $212,000
• Performance Bonus if On Time = $42,400
• Bonus increase per week = $10,600
• Probability On Time = 55%
• Probability One Week Late = 30%
• Probability Two Weeks Late = 15%

We calculate the expected bonus:

• On Time Bonus = 55% * $42,400 = $23,320
• One Week Late Bonus = 30% * ($42,400 + $10,600) = 30% * $53,000 = $15,900
• Two Weeks Late Bonus = 15% * ($42,400 + $10,600 + $10,600) = 15% * $63,600 = $9,540

Summing these values gives us the expected performance bonus. The total expected performance bonus is $23,320 (On Time) + $15,900 (One Week Late) + $9,540 (Two Weeks Late) = $48,760.

Thus, the transaction price Concrete Always should compute is:

Transaction Price = $212,000 (Contract Price) + $48,760 (Expected Performance Bonus) = $260,760.