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26 July, 20:18

Marle Construction enters into a contract with a customer to build a warehouse for $950,000 on March 30, 2021, with a performance bonus of $50,000 if the building is completed by July 31, 2021. 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, 2021, 65% August 7, 2021, 5% August 14, 2021, 5% August 21, 2021, The transaction price for this transaction, based on the expected value approach, is Select one:

a. $950,000

b. $995,000

c. $685,000

d. $652,500

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Answers (1)
  1. 26 July, 20:59
    0
    The correct answer is option (B).

    Explanation:

    According to the scenario, computation of the given data are as follows:

    As probability is not correctly given.

    Let probability be:

    July 31, 2021 = 65%

    August 7, 2021 = 25%

    August 14, 2021 = 5%

    August 21, 2021 = 5%

    So, We can calculate the transaction price by using following formula:

    Transaction price = (Amount + Bonus) * Probability

    July 31, 2018 = ($950,000 + $50,000) * 65% = $650,000

    August 7, 2018 = ($950,000 + $40,000) * 25% = $247,500

    August 14, 2018 = ($950,000 + $30,000) * 5% = $49,000

    August 21, 2018 = ($950,000 + $20,000) * 5% = $48,500

    So, Total transaction price = $650,000 + $247,500 + $49,000 + $48,500

    = $995,000
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