Question

Guarder Consulting enters into a contract with Smith Co. to restructure some of Smith's processes with a goal of cost savings. The contract states that Guarder will earn a fixed fee of $35,000 and earn an additional $10,000 bonus if Smith achieves $100,000 of cost savings. Guarder estimates a 55% chance that Smith will achieve $100,000 of cost savings. Assuming that Guarder determines the transaction price as the expected value of consideration, what transaction price will Guarder estimate for this contract

Answer 1

Guarder Consulting estimates the transaction price at $40,500 by adding their fixed fee of $35,000 to the expected bonus of $5,500, which is the $10,000 bonus times the 55% chance of Smith Co. achieving $100,000 of cost savings.

Step-by-step explanation:

To estimate the transaction price for Guarder Consulting's contract with Smith Co., we will use the expected value of consideration, which takes into account the probability of the different outcomes. Guarder can earn a fixed fee of $35,000, and there is a 55% chance of earning an additional $10,000 bonus. To calculate this, we multiply the bonus amount by the probability of receiving it and add the fixed fee:

• Expected bonus = 55% chance × $10,000 bonus = $5,500
• Transaction price = Fixed fee + Expected bonus = $35,000 + $5,500

Therefore, the estimated transaction price would be:

• $35,000 (fixed fee) + $5,500 (expected bonus) = $40,500

Answer 2

The transaction price that Guarder will estimate for this contract is $40,500

Step-by-step explanation:

In order to calculate what transaction price will Guarder estimate for this contract Assuming that Guarder determines the transaction price as the expected value of consideration, we would have to calculate the expected value of expected consideration as follows:

expected value of expected consideration=Fixed Fee + Additional Income

expected value of expected consideration=$35,000+($10,000*55%)

expected value of expected consideration=$35,000+$5,500

expected value of expected consideration=$40,500

The transaction price that Guarder will estimate for this contract is $40,500