Question

Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer’s home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $2,090 and sells the remote separately for $270, and offers the entire package for $2,580. VP does not sell the installation service separately. VP is aware that other similar vendors charge $320 for the installation service. VP also estimates that it incurs approximately $270 of compensation and other costs for VP staff to provide the installation service. VP typically charges 50% above cost on similar sales. Required: 1. to 3. Calculate the stand-alone selling price of the installation service using each of the following approaches.

Answer 1

1. Adjusted Market Assessment

= $320

Here the selling price will be based on what the competitors are charging for the same or a similar service.

As VP competitors are charging $320 for the service, the stand-alone selling price of the installation service will be $320 under this approach.

2. Expected Cost plus Margin

Here the company will add a margin on the expenses and costs it incurs to provide the service.

VP incurs $270 of compensation and other costs for VP staff and typically charges a 50% margin above cost on similar sales.

Selling price = 270 * ( 1 + 50%)

= $405

3. Residual

Under this approach, all other components of the package sale are subtracted from the package price and the amount remaining will be the price of the component in question.

= Package - 60-inch TV - remote

= 2,580 - 2,090 - 270

= $220