Felix Corp

Essay

Felix Corp. is evaluating a contract to determine proper revenue recognition. The contract is for construction of 10 yachts for a total price of $10,000,000. The customer needs the boats in its showrooms by March 1, 2018, for the yacht purchase season; the customer will provide a bonus payment of $100,000 if all yachts are delivered by the March 1 deadline. The bonus is reduced by $25,000 each week that the boats are delivered after the deadline until no bonus is paid if the boats are delivered after March 22, 2018. Felix frequently includes such bonus terms in it contracts and thus has good historical data for estimating the probabilities of completion at different dates. It estimates an equal probability (25%) for each full delivery outcome. Assume that Felix has limited experience with a construction project on the same scale as the 10 yachts. How should Felix determine the transaction price for this contract?