Question

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Hospital Equipment Company (HEC) acquired several fMRI machines for its inventory at a cost of $3,300 per machine. HEC usually sells these machines to hospitals at a price of $6,720. HEC also separately sells 12 months of training and repair services for fMRI machines for $1,680. HEC is paid $6,720 cash on November 30 for the sale of an fMRI machine delivered on December 1. HEC sold the machine at its regular price, but included one year of free training and repair service.

Required:

For the machine sold at its regular price, but with one year of “free” training and repair service, determine the dollar amount of revenue earned from the equipment sale versus the revenue earned from the training and repair services.

Find the allocated transaction price of the equipment and the service:

Answer 1

Solution:

In case of combined transaction price, Allocation of price between Equipment and Service is done in the ratio of their regular sale price.

Revenue received for combined transaction of the machine and service = $6,720

Regular sale price of Machine = $6,720 and Regular sale price of training and repair service = $1,680

Therefore, Revenue will be allocated in the ratio of 6720:1680

Revenue earned from equipment sale = $6720 * $6720 / $8400 = $5,376

Revenue earned from training and repair services = $6720*$1680/$8400 = $1,344