Jeff Heun, president of Sarasota Always, agrees to construct a concrete cart pat

Question

Jeff Heun, president of Sarasota Always, agrees to construct a concrete cart path at Dakota Golf Club. Sarasota Always enters into a contract with Dakota to construct the path for $206,000. In addition, as part of the contract, a performance bonus of $32,400 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $8,100 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 60% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 10% probability that he will be 2 weeks late.

LINK TO TEXT

Jeff Heun, president of Sarasota Always, agrees to construct a concrete cart path at Dakota Golf Club. Sarasota Always enters into a contract with Dakota to construct the path for $206,000. In addition, as part of the contract, a performance bonus of $32,400 will be paid based on the timing of completion. The performance bonus will be paid fully if completed by the agreed-upon date. The performance bonus decreases by $8,100 per week for every week beyond the agreed-upon completion date. Jeff has been involved in a number of contracts that had performance bonuses as part of the agreement in the past. As a result, he is fairly confident that he will receive a good portion of the performance bonus. Jeff estimates, given the constraints of his schedule related to other jobs , that there is 60% probability that he will complete the project on time, a 30% probability that he will be 1 week late, and a 10% probability that he will be 2 weeks late.

Explanation / Answer

Solution 1:

Transaction price = Contract price + Expected performance bonus

Expected performance bonus = ($32,400*60%) + ($24,300*30%) + ($16,200*10%) = $28,350

Transaction price = $206,000 + $28,350 = $234,350

Solution 2:

Expected performance bonus = ($32,400*97%) + (24300*3%) = $32,157

Transaction price = $206,000 + $32,157 = $238,157

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