Problem
Moover Construction enters into a contract with a customer to build a warehouse for $900,000 on June 30, 2017, with a performance bonus of $60,000 if the building is completed by October 31, 2017. The bonus is reduced by $20,000 each week that completion is delayed. The contract also states that if the warehouse receives a favorable safety inspection rating from the government inspectors by November 30, 2017, Moover will receive a performance bonus of $40,000.
Moover commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
Completed by Probability
October 31, 2017 - 35%
November 7, 2017 - 50%
November 14, 2017 - 10%
November 21, 2017 - 5%
In addition, Moover estimates there is a 90% chance that the warehouse will receive a favorable saftey inspection rating upon timely completion.
Required:
A.) Assume Moover uses the expected value approach. Determine the transaction price for this transaction.
B.) Assume Moover uses the most likely amount approach. Determine the transaction price for this transaction.