Question

Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2018 with a performance bonus of $50,000 if the building is completed by July 31, 2018. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes: Completed by Probability July 31, 2018 65% August 7, 2018 5% August 14, 2018 5% August 21, 2018 The transaction price for this transaction, based on the expected value approach, is:_______.

a. $950,000
b. $995,000
c. $685,000
d. $652,500

Answer 1

b. $995,000

Step-by-step explanation:

The computation of the transaction price based on the expected value approach is shown below:

The formula is

= (Building cost of warehouse + bonus) × probability percentage

Date Calculation Amount

July 31, 2018 ($950,000+$50,000) × 0.65 $650,000

August 7, 2018 ($950,000+$40,000) × 0.25 $247,500

August 14, 2018 ($950,000+$30,000) × 0.05 $49,000

August 21, 2018 ($950,000+$20,000) × 0.05 $48,500

Total $995,000

Since the bonus is reduced $10,000 each week so $10,000 is deducted for every delayed week