Question

Jeff Heun, president of Marin Always, agrees to construct a concrete cart path at Dakota Golf Club. Marin Always enters into a contract with Dakota to construct the path for $181,000. In addition, as part of the contract, a performance bonus of $39,600 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 $9,900 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 60% probability that he will complete the project on time, a 25% probability that he will be 1 week late, and a 15% probability that he will be 2 weeks late.

Determine the transaction price that Marin 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 95% and otherwise it will be finished 1 week late, determine the transaction price.

Transaction Price: $

Answer 1

The transaction price would be the sum of contract price plus estimated performance bonus. Estimated performance bonus would be computed on the basis of weights based on probabilities.

Requirement a

Computation of estimated performance bonus

Particulars	Probability	Amount	Estimated Amount
Project completed on time	60%	39,600	23,760
1 week later	25%	39,600-9900 = 29,700	7425
2 weeks later	15%	39,600-9900-9900 = 19,800	2970
Estimated performance bonus	34,155

Transaction price = Contract price + estimated bonus = 181,000 +34,155 =$ 215,155

Requirement b

Computation of estimated performance bonus

Particulars	Probability	Amount	Estimated Amount
Project completed on time	95%	39,600	37,620
1 week later	5%	39,600-9900 = 29,700	1485
Estimated performance bonus	39,105

Transaction price = Contract price + estimated bonus = 181,000 +39,105 =$ 220,105

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