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Allocating Revenues Bundling of products gives rise to revenue-allocation issues.
Revenues and Bundled Products A bundled productis a package of two or more products (or services) sold for a single price. Bundled product sales are also referred to as “suite sales.” The individual components of the bundle also may be sold as separate items at their own “stand-alone” prices.
Revenues and Bundled Products What businesses provide bundled products? Banks Hotels Tours • Checking • Safety deposit boxes • Investment advisory • Lodging • Food and beverage services • Recreation • Transportation • Lodging • Guides
Revenue Allocation Methods English Languages Institute buys English language software programs and then sells them in Mexico and Central America. English sells the following programs: Grammar, Translation, and Composition These programs are offered stand-alone or in a bundle.
Revenue Allocation Methods Stand-alonePrice Grammar $255 Translation $ 85 Composition $185 Purchasing these software programs costs English the following: Grammar $180 Translation $ 45 Composition $ 95
Revenue Allocation Methods Prices for Bundle (Suites)Price Grammar + Translation $290 Grammar + Composition $350 Grammar + Translation + Composition $410
Revenue Allocation Methods The two main revenue allocation methods are: 1. The stand-alone method 2. The incremental method
Stand-Alone RevenueAllocation Method There are three types of weights for the stand-alone revenue allocation method. 1. Selling prices 2. Unit costs 3. Physical units
Stand-Alone RevenueAllocation Method Consider the Grammar and Translation suite, which sells for $290. How much weight should English Languages Institute assign to each item?
Stand-Alone Revenue Allocation Method Selling prices: The individual selling prices are $255 for Grammar and $85 for Translation. $255+85 = $340 total, so… Grammar: $255 ÷ $340 = 0.75, $290 bundle SP × 0.75 = $217.50 Translation: $85 ÷ $340 = 0.25, $290 × 0.25 = $72.50
Stand-Alone RevenueAllocation Method Unit costs: This method uses the costs of the individual products to determine the weights for the revenue allocations. Grammar: $180 ÷ $225 = 0.80, $290 × 0.80 = $232 Translation: $45 ÷ $225 = 0.20, $290 × 0.20 = $58
Stand-Alone RevenueAllocation Method Physical units: This method gives each product unit in the suite the same weight when allocating suite revenue to individual products. With two products in the suite, each product is allocated 50% of suite revenues. 1 ÷ (1 + 1) = 0.50 $290 × 0.50 = $145
Comparing the Results of theStand-Alone Methods Revenue Allocation Weights GrammarTranslation Selling prices $217.50 $ 72.50 Unit costs 232.00 58.00 Physical units 145.00 145.00
Incremental RevenueAllocation Method The first-ranked product is termed the primary productin the bundle. The second-ranked product is termed the first incremental product. The third-ranked product is the second incremental product, and so on.
Incremental RevenueAllocation Method Assume that Grammar is designated as the primary product. If the suite selling price exceeds the stand- alone price of the primary product, the primary product is allocated 100% of its stand-alone revenue.
Incremental RevenueAllocation Method Grammar and Translation suite selling price = $290 per day Allocated to Grammar: $255 Remaining to be allocated: ($290 – $255) = $35 Allocated to Translation: $35