Entity A operates outsourced call centers for retail and manufacturing companies. It is compensated through fixed minimum amounts plus variable amounts based on average customer wait times. Entity A negotiates a new one-year contact with a customer it has been serving for the past six years. The contract states that the fixed amount payable for the annual service is $12 million per year and $12 per calls for calls in excess of 1.2 million. Entity A is also able to earn an annual bonus payment of $1.2 million of the average annual customer wait time is less than 4 minutes.
Entity A determines that its handling of service center calls is the only performance obligation in the contract. Based on previous experience, Entity A: (1) Expects the volume of calls this year to be 1.5 million; and (2) Estimates that there is a 75% probability that average wait times will be less than four minutes and a 25% chance it will exceed four minutes. Entity A uses the most likely amount to compute variable consideration.
A. Determine the transaction price of the contract.
B. At the end of the first quarter, Entity A has handled a total of 360,000 service center calls. It recognizes revenue based on the proportion of calls completed relative to the total number of calls expected. How much revenue will Entity A recognize at the end of the first quarter?