Question

Exercise 6-15 (Algo) Approaches for estimating stand-alone selling prices (LO6-6) Video Planet (VP) sells a big screen TV package consisting of a 60-inch plasma TV, a universal remote, and on-site installation by VP staff. The installation includes programming the remote to have the TV interface with other parts of the customer's home entertainment system. VP concludes that the TV, remote, and installation service are separate performance obligations. VP sells the 60-inch TV separately for $2,030 and sells the remote separately for $240, and offers the entire package for $2,460. VP does not sell the installation service separately. VP is aware that other similar vendors charge $290 for the installation service. VP also estimates that it incurs approximately $240 of compensation and other costs for VP staff to provide the installation service. VP typically charges 50% above cost on similar sales. Required: 1. to 3. Calculate the stand-alone selling price of the installation service using each of the following approaches. Stand Alone Selling Price Adjusted market assessment Expected cost plus margin Residual

Answer 1

1) Adjusted market assessment

Under this approach, VP would estimate its selling price on the basis of charges buy other vendors.Therefore, VP would estimate stand alone selling price of installation service to be $290 i.e the amount charged by its competitor.

Answer: $290

2) Expected cost plus margin

=estimated cost+normal margin

Expected cost = $240 (compensation and other cost for VP staff)

Margin = 50% above cost

Expected cost plus margin = $240 + ($240*50%)

=$360

Answer: $360

3) Residual

under this approach VP would estimate its stand alone selling price for installation as total selling price of package ($2,460) less stand alone selling price of TV ($2,030 ) and remote ($240)

=$2,460 - ($2,030+$240)

=$190