Question

In 2016, ToughBuilder began work on a two-year fixed price contract project. ToughBuilder recognizes revenue over time according to percentage of completion for this contract, and provides the following information (dollars in millions). What is the fixed contract price for ToughBuilder's project? (ToughBuilder's fiscal year end is 12/31)

Accounts receivable, 12/31/2016 (from construction progress billings) $50
Actual construction costs incurred in 2016 $135
Cash collected on project during 2016 $105
Gross profit recognized for 2016 $65
Estimated percentage of completion during 2016 50%

Answer 1

The fixed contract price for ToughBuilder's project is $400 million, calculated by using the percentage of completion method and the provided financial figures.

Step-by-step explanation:

To determine the fixed contract price for ToughBuilder's project, we need to evaluate the provided financial data and use the percentage of completion method. Given that the gross profit recognized for 2016 is $65 million and the actual construction costs incurred is $135 million, we can deduce the revenue recognized for 2016 by adding these two figures together, which gives us $200 million. Since this revenue represents 50% of the project completion, the total contract value is therefore double this half-completion amount. Thus, the fixed contract price is $400 million.

ToughBuilder's fixed contract price for the project can be calculated by dividing the gross profit recognized for 2016 by the estimated percentage of completion during 2016. In this case, the gross profit recognized for 2016 is $65 million and the estimated percentage of completion during 2016 is 50%. So, the formula would be:Fixed Contract Price = Gross Profit / Percentage of CompletionFixed Contract Price = $65 million / 50% = $130 millionTherefore, the fixed contract price for ToughBuilder's project is $130 million.