Walker Consulting helped McCall Roofers put various cost saving techniques into

Question

Walker Consulting helped McCall Roofers put various cost saving techniques into place. The contract specifies that Walker will receive a flat fee of $70,000 and an additional $19,000 if McCall attains a target amount of cost savings. Walker estimates a 20% chance that McCall will reach the target for cost savings. Assuming that Walker uses the expected-value approach, what is the transaction price for this product?

13. Walker Consulting helped McCall Roofers put various cost saving techniques into place. The contract specifies that Walker will receive a flat fee of $70,000 and an additional $19,000 if McCall attains a target amount of cost savings. Walker estimates a 20% chance that McCall will reach the target for cost savings. Assuming that Walker uses the expected-value approach, what is the transaction price for this product? a. $19,000 b. $70,000 c. $73,800

Explanation / Answer

Answer is C

As there is a 20% chance of McCall will reach the target for cost savings, the expected value of the additional amount being realised is $3,800 (20% of $19,000).

Hence the value of the transaction = $70,000 + 43,800 = $73,800.

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