Business, 17.04.2020 20:32 floresguppy

Gladwell Company enters into a contract to build specialized production equipment for Malcolm Manufacturing for $1,250,000. Malcolm would like the equipment delivered as soon as possible so it offers Gladwell a performance bonus for early delivery of the equipment. According to the contract, Malcolm will pay a performance bonus of $100,000 if Gladwell is able to complete the equipment by March 1, 20X6. The performance bonus is reduced by 20% for each of the first three weeks after March 1, 20X6. If the completion is delayed more than three weeks, then Gladwell forfeits the entire performance bonus.
Gladwell's prior experience with performance bonuses on similar contracts indicates the following probabilities of completion outcomes:

Completed by Probability
March 1, 20X6 50%
March 8, 20X6 20%
March 15, 20X6 10%
March 22, 20X6 15%
March 22, 20X6 5%

How much should Gladwell record as the transaction price of the contract?

a) $1,328,000 b) $1,250,000 c) $1,265,500 d) $1,350,000

Answers: 3

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