Question

The Appliance Store is an experienced home appliance dealer. Appliance Store also offers a number of services together with the home appliances that it sells. Assume that Appliance Store sells dishwashers on a standalone basis. Appliance Store also sells installation services and maintenance services for dishwashers. However, Appliance Store does not offer installation or maintenance services to customers who buy dishwashers from other vendors. Pricing for dishwashers is as follows: Dishwasher only $1,140 Dishwasher with Installation service 1,260 Dishwasher with maintenance services 1,380 Dishwasher with installation and maintenance services 1,450 In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $240. Additionally, the incremental amount charged by Appliance Store for installation approximates the amount charged by independent third parties. Dishwashers are sold subject to a general right of return. If a customer purchases a dishwasher with installation and/or maintenance services, in the event Appliance Store does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $1,140. (a) Indicate the amount of revenue that should be allocated to the dishwasher the installation, and to the maintenance contract.

Answer 1

Solution a:

Revenue if these service are sold separately:

Dishwasher = $1,140

Installation = $1,260 - $1,140 = $120

Maintenance = $240

Total revenue = $1,140 + $120 + $240 = $1,500

Therefore combine revenue of $1,450 will be allocated in ratio of 1140:120:240

Revenue allocation to dishwasher, installation and maintenance contract:

Dishwasher = $1,140/$1,500 * $1,450 = $1,102

Installation = $120/$1,500 * $1,450 = $116

Maintenance = $240/$1,500 * $1,450 = $232