Question 3 (Price determination and allocation).

Morgan Company provides transportation to ski lodge customers to and from area lodging under a one-year agreement. Morgan is required to provide scheduled transportation throughout the year for a fixed fee of $250,000 annually. Morgan Company also is entitled to performance bonuses based on on-time performance and average customer wait times. Its performance may yield a bonus from $0 to $500,000 under the contract. Based on its history with the ski lodge and customer travel patterns and its current expectations, Morgan Company estimates the probabilities for different amounts of bonus within the range as follows:

Dollar bonus amount Probability of outcome

0 .25

100,000 .30

300,000 .35

500,000 .10

Required:

1. Because Morgan Company believes that there is no one amount within the range that is most likely to be received, Morgan Company determines that the expected value approach is most appropriate. Determine the expected value of the bonus