Question

Peter’s Pics encounters revenue-allocation decisions with its bundled movie deal. Here, two or more of the movie videos are sold as a single package. Managers at Peter’s Pics are keenly interested in individual product profitability figures. Information pertaining to its three bundled products and the stand-alone selling prices of its individual products is as follows:

Individual Products	Stand-Alone Selling Price	Peter's Cost to Acquire		Packages	Packaged Price
New Releases	$15	$2.00		#1 New & Older	$20
Older Releases	$10	$1.50		# 2 New & Classics	$17
Classics	$8	$1.25		#3 All Three (New, Older, & Classics)	$25

Allocate the $25 packaged price of "All Three" to the three types of videos using the incremental revenue-allocation method. Assume New Releases is the primary product, followed by Older Releases, and then Classics.

a) new $8.33; older $8.33; classics $8.33

b) new $10.53; older $7.89; classics $6.58

c) new $11.36; older $7.58; classics $6.06

d) new $15.00; older $10.00; classics – 0 -

Miami, Inc. manufactured 250,000 units of its single product in 2019, its first year of operation. Variable manufacturing cost was $10 per unit produced. Variable operating (nonmanufacturing) cost was $2 per unit sold. Planned and actual fixed manufacturing costs were $750,000. Planned and actual fixed operating (nonmanufacturing) costs totaled $420,000. Miami sold 200,000 units of product at $20.

Miami’s 2019 operating income using absorption costing is

a) $580,000

b) $650,000

c) $1,000,000

d) $430,000

Answer 1

Part A:

Allocation of the $25 Packaged price on the basis of the Incremental revenue allocation method is

For new = 25/33*15 = $ 11.36

For older = 25/33*10 = $ 7.58

For classics = 25/33 * 8 = $ 6.06

Option C. new $11.36; older $7.58; classics $6.06 is the answer.

Part B:

Particulars	$	$
Sales(200,000 units)		4000000
Less :
Manufacturing Cost		2750000
Variable manufacturing costs	2000000
Fixed Manufacturing costs	750000
Less :
Non-Manufacturing Cost		820000
Variable Operating costs	400000
Fixed Non- operation costs	420000
Operating Income		430000

Option D. $ 430,000 is the answer.