Question

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 $1,830 and sells the remote separately for $140, and offers the entire package for $2,060. VP does not sell the installation service separately. VP is aware that other similar vendors charge $190 for the installation service. VP also estimates that it incurs approximately $140 of compensation and other costs for VP staff to provide the installation service. VP typically charges 30% above cost on similar sales.

Required:
1. to 3. Calculate the stand-alone price of the installation service using each of the following approaches.

1) Adjusted Market assessment:

2) Expected Cost plus Margin:

3) Residual:

Answer 1

	Stand-alone Selling Price
Adjusted market assessment	$240
Expected cost plus margin	$266
Residual	$140

Explanation

1. Under the adjusted market assessment, VP would base its estimate of the stand-alone selling price of the installation service on the prices charged by other vendors for that service, adjusted as necessary. Given that the other vendors are similar to VP, no adjustment is necessary.Therefore, VP would estimate the stand-alone selling price of the installation service to be $240, the amount charged by competitors for that service.

2.Under the expected cost plus margin approach, VP would base its estimate of the stand alone selling price of the installation service on the $190 cost it incurs to provide the service, plus its normal margin of 40% x $190 = $76. Therefore, VP would estimate the stand-alone selling price of the installation service to be $190 + 76 =$266.

3.Under the residual approach, VP would base its estimate of stand-alone selling price of the installation service on the total selling price of the package ($2,260) less the observable stand-alone selling prices of the TV($1,930) and universal remote ($190). Therefore, VP would estimate the stand-alone selling price of the installation service to be $2,260 - ($1,930+190) = $140.