Princey Playhouses contracts with the royal family to build prince George the pl

Question

Princey Playhouses contracts with the royal family to build prince George the playhouse of his dreams for $147,000. there is a performance bonus of $10,000 if the project is completed by the little prince's birthday. the bonus decreases by $1,000 for every week the project goes past the birthday.

assuming Pricey Playhouse estimates a 55% chance of completing by the birthday, a 30% chance of being one week late, and a 15% chance of being two weeks late.

based on the probability of weighted estimate, the transaction price would be?_______________

based on the most likely estimation method, assuming management believes they will finish bt the birthday deadline, the transaction price would be?______________

Explanation / Answer

1.

Bonus price if project completed by birthday (55% probability) = $10,000

Bonus price if project completed one week late (30% probability) = $10,000 - $1,000 = $9,000

Bonus price if project completed two week late (15% probability) = $10,000 - $2,000 = $8,000

Transaction price = $147,000 + (10,000 * 0.55 + 9,000 * 0.30 + 8,000 * 0.15) = $156,400

2.

Assuming the most likely estimation method, means that the project will be completed before birthday so, the transaction price will be $147,000 + $10,000 = $157,000

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