Question:
Leo Consulting writes a contract with Highgate University to restructure Highgate’s processes for
purchasing goods and services from suppliers. The contract promises that Leo will earn a fixed fee of
$25,000, and earn an additional
$10,000 if Highgate achieves $100,000 of cost savings. Leo estimates that there is a 50% chance that
Highgate will achieve $100,000 of cost savings. Assuming Leo determines transaction price as the
probability-weighted amount of expected consideration, what transaction price would Leo estimate for
this contract?
Answer:
Total estimated contract price = $25,000 + (50% x $10,000) = $30,000
Leo Consulting writes a contract with Highgate University to restructure Highgate’s processes for
purchasing goods and services from suppliers. The contract promises that Leo will earn a fixed fee of
$25,000, and earn an additional
$10,000 if Highgate achieves $100,000 of cost savings. Leo estimates that there is a 50% chance that
Highgate will achieve $100,000 of cost savings. Assuming Leo determines transaction price as the
probability-weighted amount of expected consideration, what transaction price would Leo estimate for
this contract?
Answer:
Total estimated contract price = $25,000 + (50% x $10,000) = $30,000
