on april 1st, bob the builder entered into a contract of one-month duration to build a barn for nolan. bob is guaranteed to receive a base fee of $4,900 for his services in addition to a bonus depending on when the project is completed. nolan created incentives for bob to finish the barn as soon as he can without jeopardizing the structural integrity of the barn. nolan offered to pay an additional 25% of the base fee if the project finished 2 weeks early and 15% if the project finished a week early. the probability of finishing 2 weeks early is 20% and the probability of finishing a week early is 60%. what is the expected transaction price with variable consideration estimated as the expected value?

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PriyaMM PriyaMM · Answer 1 · 2022-11-19T17:45:33+01:00

Any remuneration you give an employee over and beyond their base hourly rate or salary is known as additional pay.

This is a succinct summary of the query:

Duration Pay Probability

Normal $4,900 1

finish 2 wks early 25% more 25% or 0.25

finish 1 wk early 20% more 55% or 0.55

At Normal Duration,

Total Pay = Pay x Probability = $4,900 x 1 = $4900

At finish 2 wks early (25% variable consideration),

Additional pay = $4,900 x 25%

= $4,900 x 0.25

= $1,225.

Total pay (at 25% probability) =$4,900 x 0.25 = $1,225

At finish 1 wk early (20% variable consideration)

Additional pay = $4,900 x 20%

= $4,900 x 0.20

= $980.

Total pay (at 60% probability) = $4,900 x 0.6 = $2940

At finish (10% variable consideration)

Additional pay = $4,900 x 60%

= $4900x 0.1

= $490

Total pay (at 0% probability) = $490 x 0 = $0

Hence,

the expected transaction price with the variable consideration estimated as the expected value

Grand total = $4900+ $980+ $2940+ 0 = 8820.

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