Question

g Marlboro Construction enters into a contract with a customer to build a warehouse for $725,000 on April 15, 2021 with a completion date of September 15, 2021. The contract contains a performance clause such that Marlboro will receive a $12,000 bonus for each week the contract is completed early. Likewise, the agreed contract price will be reduced by $12,000 for each week the contract is completed after the due date. These clauses are commonly included in Marlboro contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability September 1 10% September 8 30% September 15 25% September 22 20% September 29 15% The transaction price for this transaction, using the most likely amount method is A. $471,250 B. $725,000 C. $737,000 D. $713,000

Answer 1

B. $725,000

Step-by-step explanation:

The expected value for the contract will be :

10% ($725,000 + 12,000 + 12,000 ) + 30% ($725,000 + 12,000 ) + 25% ($725,000 ) + 20% ($725,000 - 12,000 ) + 15% ($725,000 - 12,000 - 12,000 )

= $ 74,900 + $221,100 +$181,250 + $142,600 + $105,150 = $725,000

Marlboro constructions expected value of the contract is 725,000 based on the given probability estimates of contract completion.