Question
2. Django Tarantino Designs enters into a contract to construct an asset for a customer. The agreed price is 500,000 and the specified delivery date
2. Django Tarantino Designs enters into a contract to construct an asset for a customer. The agreed price is 500,000 and the specified delivery date is 30 August 2020. However, if the asset is delivered after this date, the company will suffer a late delivery penalty of 20,000 for each week between 31 August 2020 and the actual date of delivery. The company estimates that the probability of the asset being delivered on time is 80%. But there is a 10% probability that the asset will be delivered one week late and a further 10% probability that the asset will be delivered two weeks late. Requirements: a) What is your prediction for the transaction price? (2 marks) b) Explain what is meant by variable transaction price and why using the Expected Value method is more suitable than the Most Likely Amount method in this scenario. (4 marks) Total: 6 marks
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