Question

Nash Appliance Center is an experienced home appliance dealer. Nash Appliance Center also offers a number of services for the home appliances that it sells. Assume that Nash Appliance Center sells ovens on a standalone basis. Nash Appliance Center also sells installation services and maintenance services for ovens. However, Nash Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows. Oven only $780 Oven with installation service 850 Oven with maintenance services 1,000 Oven with installation and maintenance services 1,020 In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $220. Additionally, the incremental amount charged by Nash Appliance 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 Nash Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $780. Assume that a customer purchases an oven with both installation and maintenance services for $1,020. (b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract. (Do not round intermediate calculations. Round final answers to 2 decimal places.) Oven 0 Installation Maintenance $

Answer 1

Ans:

Step 1)The standalone cost of installation service = cost of oven with installation -cost of oven only

                                            = 850-780

                                             = 70

Step 2)Allocation of purchase cost and weights of standalone price

Item	Standalone price	Weight	Share in purchase cost of 1020
Oven	780	780/1070 = 72.89719%	1020*72.89719%=743.55
Installation	70	70/1070= 6.542056%	1020*6.542056%=66.73
Maintenance	220	220/1070 = 20.560747%	1020*20.560747%=209.72
	1070		1020

b)

Item	Amount of revenue allocated
Oven	743.55
Installation	66.73
Maintenance	209.72
Total	1020