Question

Appliance Center is an experienced home appliance dealer. Appliance Center also offers a number of services for the home appliances that it sells. Assume that Appliance Center sells ovens on a standalone basis. Appliance Center also sells installation services and maintenance services for ovens. However, Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.

Oven only 803
Oven with installation service 910
Oven with maintenance services 976
Oven with installation and maintenance services 1,040

In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $173. Additionally, the incremental amount charged by The Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event The Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $803. Assume that a customer purchases an oven with both installation and maintenance services for $1,040.

Required:
Indicate the amount of revenues that should be allocated to the oven, the installation, and to the maintenance contract.

Answer 1

To allocate the revenues for the combination purchase, subtract the standalone selling prices of the oven and maintenance contract from the total package price. This gives an allocation of $803 for the oven, $64 for installation service, and $173 for the maintenance contract.

Step-by-step explanation:

To calculate the revenue allocation for the oven, installation, and maintenance contract, we have to break down the total price of $1,040 into separate parts based on the standalone selling prices provided.

The standalone selling price of the oven is $803, and the price with just the maintenance service is $976, which means the standalone selling price of the maintenance service is $976 - $803 = $173. The price of the oven with both services is $1,040. Since we know the maintenance price is $173, to find out the installation price, we subtract the standalone oven price ($803) and the maintenance price ($173) from the total price ($1,040).

So the installation service price is calculated as $1,040 - $803 - $173 = $64.

Therefore, the revenues should be allocated as follows:

• Oven: $803
• Installation Service: $64
• Maintenance Contract: $173