A contractor enters into a contract for the expansion of an existing two-lane highway to a three-lane highway. Thecontract price is P65 million plus a P5 million award fee if the expansion is complete before the holiday travelseason. The contract is expected to take one year to complete. The contractor has a long history of performingthis type of highway work. The award fee is binary; that is, if the job is finished before the holiday travel season,the contractor receives the full award fee. The contractor does not receive any award fee if the highway is notfinished before the holiday season. The contractor believes, based on its significant past experience, that it is 95percent likely that the contract will be completed in advance of the holiday travel season. How much should the contractor account for the award fee?

A contractor enters into a contract for the expansion of an existing two-lane highway to a three-lane highway. Thecontract price is P65 million plus a P5 million award fee if the expansion is complete before the holiday travelseason. The contract is expected to take one year to complete. The contractor has a long history of performingthis type of highway work. The award fee is binary; that is, if the job is finished before the holiday travel season,the contractor receives the full award fee. The contractor does not receive any award fee if the highway is notfinished before the holiday season. The contractor believes, based on its significant past experience, that it is 95percent likely that the contract will be completed in advance of the holiday travel season. How much should the contractor account for the award fee?

Purchasing and Supply Chain Management

6th Edition

ISBN:9781285869681

Author:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson

Publisher:Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson

ChapterC: Cases

Section: Chapter Questions

Problem 5.4SA

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