Hunter Kingston is the owner of Kingston Roofing Company. He signed a contract with the homeowners' association of Maple Mills Townhomes for roof repair and some masonry work.

 Hunter Kingston is the owner of Kingston Roofing Company. He signed a contract with the homeowners' association of Maple Mills Townhomes for roof repair and some masonry work. They agreed on the price of $75,000, which included labor and materials. In addition, as part of the contract, Maple Mills agreed to pay a bonus of $8,000 depending on the on-time completion of the project. The bonus will be paid in full if Hunter Kingston completes the work by the agreed-on date. The performance bonus decreases by $1,000 per week for every week after the agreed-on completion date. Hunter has been in the roofing business for many years and feels confident that the likelihood he will receive the bonus is high. He estimates that there is an 85% chance he will complete the project on time, a 10% chance he will complete it one week late, and a 5% chance he may be two weeks late.

 

Explanation

Transaction price = Contract price + Expected value of bonus = $75,000 + $7,800 = $82,800. 

Using the probability-weighted method, 

Expected value of bonus = ($8000 × 85%) + ($7,000 × 10%) + ($6,000 × 5%) = $7,800. 

Task Two
Assume that given other ongoing jobs, Hunter realized that he most likely will have a lower probability of finishing the job on time. He thinks now he will have a 70% chance of on-time completion, a 20% chance he will be one week late, and a 10% chance he will be two weeks late.

Determine the new transaction price for this contract given the timing change. Record your answers in the space provided for each circumstance.

Explanation

Transaction price = Contract price + Expected value of bonus = $75,000 + $7,600 = $82,600. 

Using the probability-weighted method, 

Expected value of bonus = ($8000 × 70%) + ($7,000 × 20%) + ($6,000 × 10%) = $7,600.

Thanks