Question

Jeff Heun, president of Carla Always, agrees to construct a concrete cart path at Dakota Golf Club. Carla Always enters into a contract with Dakota to construct the path for $235,000. In addition, as part of the contract, a performance bonus of $32,800 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $8,200 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs, that there is 55% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Determine the transaction price that Carla Always should compute for this agreement.

Transaction Price

$

Assume that Jeff Heun has reviewed his work schedule and decided that it makes sense to complete this project on time. Assuming that he now believes that the probability for completing the project on time is 97% and otherwise it will be finished 1 week late, determine the transaction price.

Transaction price

$

Answer 1

Given,

Contract Price for construction of Path = $235,000

Performance Bonus if work completed on agreed upon date =$32,800

As per question, performance bonus decreases by $8,200 per week for every week beyond the the agreed - upon completion date

Requirement a

Calculation of Performance Bonus based on other jobs

Particulars	Probability	Workings	Amount	Estimated amount (Amount X probability)
Project completed on time	55%	32,800	32,800	$32,800*55%= $18,040
1 week late	30%	$32,800-($8200*1)	24,600	$24,600*30%=$7380
2 week late	15%	$32,800-($8,200*2)	16,400	$16,400*15%=$2460
Total Estimated performance bonus				27880

Transaction price that Carla Always should compute for this agreement is $235,000 + $27,880 = 262,880

Requirement b

Calculation of performance Bonus

Particulars	Probability	Workings	Amount	Estimated amount (Amount X probability)
Completed on time	97%	32,800	32,800	$32,800*97%= $31816
1 Week late	3%	$32,800-($8200*1)	24,600	$24,600*3%= $738
Estimated performance bonus				$32554

Transaction Price = $235,000 + $32,554 = $267,554

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