In January, Cigaro Corp. agrees to a contract to sell 14,000 sports caps for $140,000 to Dilly, Inc. In March, after 5,000 caps have been delivered, Cigaro and Dilly modify the agreement to sell an additional 6,000 caps for $33,000 which is significantly lower than Cigaro's stand-alone selling price at that time. During April, Cigaro delivers 2,000 caps. How much revenue will Cigaro recognize for the month of April?
A) $17,300
B) $16,400
C) $15,500
D) $11,000

Question

Quizplus · Accepted Answer

Cigaro will recognize $16,400 in revenue for April. The original contract was for 14,000 caps at $140,000, which is $10 per cap. The modification added 6,000 caps at $33,000, which is $5.50 per cap. In April, 2,000 caps were delivered. Since the modification created a new single performance obligation that is distinct from the original contract, the revenue recognized should reflect the blended price per cap across the entire modified contract (20,000 caps for $173,000, or $8.65 per cap). Thus, for the 2,000 caps delivered in April, Cigaro would recognize 2,000 caps * $8.65/cap = $16,400.