Question

On april 1st, bob the builder entered into a contract of one-month duration to build a barn for nolan. bob is guaranteed to receive a base fee of $6,000 for his services in addition to a bonus depending on when the project is completed. nolan created incentives for bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. nolan offered to pay an additional 20% 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 65%. what is the expected transaction price if bob estimates variable consideration as the most likely amount? multiple choice

- $6,000
- $6,900
- $7,980
- $5,700

Answer 1

The correct answer is none of these. The expected transaction price of Bob's contract would be $6,825, considering a 20% chance of finishing 2 weeks early and a 65% chance of finishing 1 week early. As this option is not available in the multiple choices, there may be an error in the provided question or options.

Step-by-step explanation:

The question asks about calculating the expected transaction price with a base fee and additional bonuses based on the probability of finishing the project earlier. To calculate the expected transaction price when Bob the Builder estimates variable consideration as the most likely amount, we need to account for the probabilities of finishing the project at different times and the corresponding bonuses.

Firstly, Bob has a base fee of $6,000, which is guaranteed. Now, there is a 20% probability of finishing 2 weeks early, which would add a 20% bonus to the base fee. The bonus for finishing 2 weeks early is therefore 0.20 × $6,000 = $1,200. The expected bonus for this scenario is 0.20 × $1,200 = $240. Similarly, there is a 65% probability of finishing 1 week early, which would add a 15% bonus to the base fee. The bonus for finishing 1 week early is 0.15 × $6,000 = $900, and the expected bonus for this is 0.65 × $900 = $585.

Bearing in mind these calculations, we add the expected bonuses to the base fee to get the expected transaction price:
$6,000 + $240 + $585 = $6,825. However, this option is not provided in the given multiple choices. The offerings closest to our calculation are either $6,000 or $6,900. Since the expected value is midway and not an available choice, it appears there may be a confusion in the question or options provided. However, Bob should expect to receive more than the guaranteed base fee due to the high probability of earning an early completion bonus.