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Tomato enters into a contract with Potato to build a greenhouse for $925,000. Potato hopes to start operations at the beginning of spring and provides
Tomato enters into a contract with Potato to build a greenhouse for $925,000. Potato hopes to start operations at the beginning of spring and provides a performance bonus of $75,000 to be paid if the greenhouse is completed by April 1st. The bonus is reduced by 20% each week that completion is delayed. Tomato has extensive experience building these greenhouses and regularly includes this type of performance bonus in its contracts. Based on prior experience, Tomato estimates the following completion outcomes: Completed on time 40% Completed one week late 45% Completed two weeks late 10% Completed three weeks late 5% Completed four or more weeks late 0% Required: Determine the transaction price for this contract under both of the following approaches: (a) "expected value" approach: (b) "most likely" amount approach
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