Problem 5

Sage Corp. enters into a contract with a customer to build an apartment building for $1,069,900. The customer hopes to rent apartments at the beginning of the school year and provides a performance bonus of $153,300 to be paid if the building is ready for rental beginning August 1, 2018. The bonus is reduced by $51,100 each week that completion is delayed. Sage commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:

Completed by		Probability
August 1, 2018		70	%
August 8, 2018		20
August 15, 2018		6
After August 15, 2018		4

(a) Determine the transaction price for the contract, assuming Sage is only able to estimate whether the building can be completed by August 1, 2018, or not (Sage estimates that there is a 70% chance that the building will be completed by August 1, 2018).

Transaction price: $__________

(b) Determine the transaction price for the contract, assuming Sage has limited information with which to develop a reliable estimate of completion by the August 1, 2018, deadline.

Transaction price: $__________