Company X sells standard lawn mowers to Biggy Hardware (BH) for $100. BH is Company X’s largest customer. Company X offers BH the following discounts based on purchases in a calendar year: ► 1 to 999 lawn mowers: 0% discount ► 1,000 to 1,500 lawn mowers: 3% discount ► More than 1,500 lawn mowers: 5% discount BH’s purchasing pattern has been very consistent over its twenty year relationship history with Company X. Company X’s management has assigned a 10% probability to a 0% discount, a 70% probability to a 3% discount and a 20% probability to a 5% discount. What is the estimated transaction price if the most likely amount is used? What is the estimated transaction price if the expected value method is used?
a. We will consider the 70% probability discount to calculate the estimated transaction price. So, the estimated transaction price if the most likely amount is used is $97 i.e. $100 - ($100*3%) b. If the expected value method is used, there will be an estimated transaction price. Discount Amount Probability Price a b c d b * c 0% $ 100. 00 10% $ 10. 00 3% $ 97. 00 70% $ 67. 90 5% $ 95. 00 20% $ 19. 00 Estimated Price $ 96.90
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