Question

ESTIMATING VARIABLE CONSIDERATION AJD BUILDERS CONSTRUCTION COMPANY ENTERS INTO A CONTRACT WITH A CUSTOMER TO BUILD A 50 KILOMETERS ROAD TO P100,000,000 WITH A PERFORMANCE BONUS OF P60,000,000 THAT WILL BE PAID BASED ON THE TIMING OF COMPLETION. THE AMOUNT OF THE PERFORMANCE BONUS DECREASES BY 10% PER WEEK FOR EVERY WEEK BEYOND THE AGREED-UPON COMPLETION DATE. THE CONTRACT REQUIREMENTS ARE SIMILAR TO CONTRACTS THAT AJD BUILDERS HAS PERFORMED PREVIOUSLY, AND MANAGEMENT BELIEVES THAT SUCH EXPERIENCE IS PREDICTIVE FOR THIS CONTRACT. MANAGEMENT ESTIMATES THAT THERE IS A 60% PROBABILITY THAT THE CONTRACT WILL BE COMPLETED BY THE AGREED UPON COMPLETION DATE, A 30% PROBABILITY THAT IT WILL BE COMPLETED ONE WEEK LATE, AND ONLY A 10% PROBABILITY THAT IT WILL BE COMPLETED TWO WEEKS LATE. REQUIRED: DETERMINE THE PROBABILITY-WEIGHTED AMOUNT FOR THE MANAGEMENT TO DETERMINE THE TRANSACTION PRICE.

Answer 1

Contract price - P 10,00,00,000 (1000lacs)

Performance bonus = P 6,00,00,000 (600 lacs)

Bonus Deduction per week on delay = 10%

Completion	Probability	Working	Amount (in lacs)
By agreed date	60%	1000 lac +(600 lac)	1600 lacs
Delay one week	30%	1000 lac +(600lac*90%)	1540 lacs
Delay two weeks	10%	1000 lacs + (600 lac *80%)	1480 lacs

#deduction assumed to be straight line basis.

PROBABILITY-WEIGHTED AMOUNT= 1600lac*60%+1540lac*30%+1480lac*10%=

960+462+148=1570 lacs. =P 15,70,00,000