Question

Bridgeport Corp. enters into a contract with a customer to build an apartment building for $947,600. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $162,900 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $54,300 each week that completion is delayed. Bridgeport 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 4
After August 15, 2018 6

Required:
a. Determine the transaction price for the contract, assuming Blue is only able to estimate whether the building can be completed by August 1, 2018, or not (Blue estimates that there is a 70% chance that the building will be completed by August 1, 2018).
b. Determine the transaction price for the contract, assuming Blue has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline.

Answer 1

The transaction price for the contract is determined by multiplying the contract price by the estimated probability of completion. If Blue has limited information, they would need to consider the various completion outcomes and their probabilities.

Step-by-step explanation:

The transaction price for the contract can be determined by multiplying the contract price of $947,600 by the estimated probability of completion by August 1, 2018. Since the estimated probability is 70%, the transaction price would be $947,600 * 0.70 = $663,320. This is the amount that Bridgeport Corp. would expect to receive for completing the contract by the specified date.

If Blue has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline, they would need to consider the various completion outcomes and their probabilities. In this case, Blue would multiply each completion outcome by its respective probability and sum up the results. Based on the given probabilities, the transaction price would be: ($947,600 * 0.70) + ($947,600 * 0.20) + ($947,600 * 0.04) + ($947,600 * 0.06) = $747,320.