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?
C. Assume instead that expected average wait times are as follows.
Expected Wait Time Probability
3 min. 30 seconds 40%
4 min. 15 seconds 20%
4 mins 45 seconds 20%
Given the probability distribution, Entity A has decided that using the expected value to compute variable consideration is more appropriate. All other contact details remain the same. Given this information, what is the new transaction price of the contract?