Question

The Center is an experienced home appliance dealer. The Center also offers a number of services together with the home appliances that it sells. Assume that The Center sells ovens on a standalone basis. The Center also sells installation services and maintenance services for ovens. However, The 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.


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

Answer 1

Answer:

The amount that should be allocated to the oven is $771.12.

The amount that should be allocated to the installation services is $102.75.

The amount that should be allocated to the maintenance services is $166.13.

Explanation:

Total price=Standard price   oven  +Standard price  Installation  +Standard price  

Maintenance ​  

=$803+$107+$173

=$1,083

Price allocated=Stand alone price of oven   / Total price  ×Price paid by customer

=  $803 / $1,083  ×$1,040

=$771.12

Price allocated=  

Stand alone price of installation service/ Total price

​  ×Price paid by customer

=  

$107 / $1,083   ×$1,040

=$102.75

​

Price allocated=   Stand alone price of maintenance service  /Total price

​  ×Price paid by customer

=   $173 /$1,083  ×$1,040

=$166.13

​