Question

Brett and Mike are students at Berkeley College. They share an apartment that is owned by Mie Meis considering subscribing to an Internet provider that has the following packages valable Package Per Month Question Help Brell spend most of his time on the Internet everything can be found online Marron his time taking on the phone when using th e ongoin is a waste of time. They that the purchase of the $50 package is a w o n Requirements 1 Alocate the w ires and wing the and one coul d the incremental location method, and the halay wale method 2. Which method would you recommend they use and why? A Internet CSS B.Phone services c. Internet access phone services Requirement 1. Allocate the $50 between Brot and Mike using (a) the stand-alone cost-allocation method nearest cont.) e incremental cost-allocation method, and the Shaply value method. Round your answers to the Costs allocated to (a) Stand-alone (b) Incremental Brett primary user Mike primary user (c) Shapley

Answer 1

1. Three methods of cost allocation are:

	Brett	Mike
Standalone	37.5	12.5
Incremental (Brett primary)	45	5
Incremental (mike primary)	35	15
Shapley value	40	10

1. Stand-alone allocation method : This method specifically allocates the cost as per use in proportion to the total cost.

Brett = 45/(15+45)   * 50 = $ 37.5

Mike = 15/(15+45) * 50 = $ 12.5

2. Incremental allocation method: This method assumes one user as the main user and allocates the cost before bundled to him and the remaining balance to secondary or incremental user as

Assuming Brett is primary user and Mike is incremental user

User	Costs allocated	Cumulative costs allocated
Brett	45	45
Mike	50-45 = 5	50
Total	50

Assuming Mike is primary user and Bret is incremental user

User	Costs allocated	Cumulative costs allocated
Mike	15	15
Brett	50-15 = 35	50
Total	50

The incremental cost allocation method creates dispute in ranking. IN the second case, Brett only pays 35 despite having the largest use.

3. Shapley value (average over costs allocated as the primary and incremental user).

User	Costs allocated
Brett	(45+35)/2 = 40
Mike	(5+15)/2 = 10
Total	50

Note that costs allocated here is average of two methods as done in requirement b.

The shapley value shall be recommended because it considers fairer approach by avoiding one user as primary user and other user as incremental user. It also takes more comprehensive approach than stand-alone method by allocating the costs near to the actual costs had they not bundled the services.

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