Binco Brass Corp. (BBC) is a wholesaler that sells musical instruments to retailers. On February 1 of the current year, BBC contracts with Music Extravaganza, Inc. (MEI) to sell 1,000 trumpets to MEI with delivery scheduled for the month of February. The contract price is $500 per trumpet. However, the contract includes the possibility of a volume discount if total annual purchases exceed a given amount. These discounts are as follows: If Total Sales Equal or Exceed Discount Percentage $1,000,000 1% $2,000,000 2% $5,000,000 5% These discounts are retroactive—once a volume trigger is met, BBC refunds to MEI amounts on previous purchases. BBC believes that it is 15% likely that it will not contract with MEI again this year. BBC believes the following probability estimates are accurate: Total Sales Probability $500,000 15% $1,000,000 60% $2,000,000 20% $5,000,000 5%
Binco Brass Corp. (BBC) is a wholesaler that sells musical instruments to retailers. On February 1 of the current year, BBC contracts with Music Extravaganza, Inc. (MEI) to sell 1,000 trumpets to MEI with delivery scheduled for the month of February. The contract price is $500 per trumpet. However, the contract includes the possibility of a volume discount if total annual purchases exceed a given amount. These discounts are as follows: If Total Sales Equal or Exceed Discount Percentage $1,000,000 1% $2,000,000 2% $5,000,000 5% These discounts are retroactive—once a volume trigger is met, BBC refunds to MEI amounts on previous purchases. BBC believes that it is 15% likely that it will not contract with MEI again this year. BBC believes the following probability estimates are accurate: Total Sales Probability $500,000 15% $1,000,000 60% $2,000,000 20% $5,000,000 5%
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Binco Brass Corp. (BBC) is a wholesaler that sells musical instruments to retailers. On February 1 of the current year, BBC contracts with Music Extravaganza, Inc. (MEI) to sell 1,000 trumpets to MEI with delivery scheduled for the month of February. The contract price is $500 per trumpet. However, the contract includes the possibility of a volume discount if total annual purchases exceed a given amount. These discounts are as follows:
If Total Sales Equal or Exceed
Discount Percentage
$1,000,000
1%
$2,000,000
2%
$5,000,000
5%
These discounts are retroactive—once a volume trigger is met, BBC refunds to MEI amounts on previous purchases. BBC believes that it is 15% likely that it will not contract with MEI again this year. BBC believes the following probability estimates are accurate:
Total Sales
|
Probability
|
$500,000
|
15%
|
$1,000,000
|
60%
|
$2,000,000
|
20%
|
$5,000,000
|
5%
|
Using the expected-value approach, what is the estimate of the consideration amount in this contract?
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