Thomas Consultants was contracted by Bran Construction to provide cost-savings initiatives and would receive a $50,000 flat fee along with an additional $20,000 if Bran reached certain cost-savings targets. There is a 20% chance the target will be met. Calculating the transaction price using expected value results in $54,000, while using most likely value is $50,000. However, if Thomas has high uncertainty due to lack of experience, the transaction price using expected value would be adjusted upward.

1. Thomas Consultants provided Bran Construction with assistance in implementing various cost-
savings initiatives.
Thomas’ contract specifies that it will receive a flat fee of $50,000 and an additional $20,000
if Bran reaches a
prespecified target amount of cost savings. Thomas estimates that there is a 20% chance that
Bran will achieve the cost-savings target.
1. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate
the transaction
price.
2. Assuming Thomas uses the most likely value as its estimate of variable consideration,
calculate the transaction
price.
3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very
uncertain of that
estimate due to a lack of experience with similar consulting arrangements. Calculate the
transaction price.
Solution
1) Expected Value Method :- The Sum of the probability weighted amounts for range of possible
contract outcomes.
= (50,000 *0.80 + 70,000 *0.20)
= 54,000. is the Transaction price.
Note :- 70,000 is Sum of Fifty & Twenty thousands mentioned in question.
2)Most Likely Value method = The Single most likely contract outcome
= 50,000 will be the transaction price assuming the cost savings target not reached.