Allocating Revenues
Bundlingof products gives rise to
revenue-allocation issues.
Revenues and Bundled Products
A bundled product is a package of two or moreproducts (or services) sold for a single price.
Bundled product sales are also referred toas “suite sales.”
The individual components of the bundle alsomay be sold as separate items at their own
“stand-alone” prices.
Revenues and Bundled ProductsWhat 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 Englishlanguage software programs and
then sells them in Mexico and Central America.English sells the following programs:
Grammar, Translation, and CompositionThese programs are offered stand-alone
or in a bundle.
Revenue Allocation Methods
Stand-alone PriceGrammar $255Translation $ 85Composition $185
Purchasing these softwareprograms costs English
the following:Grammar $180Translation $ 45Composition $ 95
Revenue Allocation Methods
Bundle (Suites) PriceGrammar + Translation $290Grammar + Composition $350Grammar + Translation + Composition$410
Revenue Allocation Methods
The two main revenue allocation methods are:
1. The stand-alonemethod
2. The incrementalmethod
Stand-Alone RevenueAllocation Method
There are four types of weights for thestand-alone revenue allocation method.
1. Selling prices 2. Unit costs
3. Physical units 4. Stand-aloneproduct revenues
Stand-Alone RevenueAllocation Method
Consider the Grammar and Translationsuite, which sells for $290.
How much weight should EnglishLanguages 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 therevenue 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 allocatingsuite 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
Stand-Alone RevenueAllocation Method
Stand-alone product revenues:This method captures the quantity of eachproduct sold as well as their selling prices.
Assume that the stand-alone revenues in 2003are Grammar $734,400, Translation $81,600,
and Composition $133,200.What are the weights for the Grammar
and Translation suite?
Stand-Alone RevenueAllocation Method
Grammar:$734,400 ÷ $816,000 = 0.90, $290 × 0.90 = $261
Translation:$81,600 ÷ $816,000 = 0.10, $290 × 0.10 = $29
Stand-Alone RevenueAllocation Method
Revenue Allocation Weights Grammar Translation
Selling prices $217.50 $ 72.50Unit costs 232.00 58.00
Physical units 145.00 145.00Stand-alone product revenues 261.00 29.00
Incremental RevenueAllocation Method
The first-ranked product is termed theprimary product in the bundle.
The second-ranked product is termedthe first incremental product.
The third-ranked product is the secondincremental product, and so on.
Incremental RevenueAllocation Method
Assume that Grammar is designatedas 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: $255Remaining to be allocated: ($290 – $255) = $35
Allocated to Translation: $35
The End
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