Question

Petale Parfum (PP) manufactures and sells upscale perfumes. In recent months, PP has started selling its products in bundled form, as well as in individual form. Sales in 2018 of three products that have been sold individually are as follows:

Stand-alone

Fraiche - Retail price $110 unit sold 20,000

Desarmer - retail price $88 unit sold 37,500

Innocence retail price $275 unit sold 20,000

Suite

Fraiche + Desarmer- Retail price $165

Fraiche + Innocence Retail price $308

Required

1. Compute the weights for allocating revenues to each division for each of the bundled products using:

a. The stand-alone revenue-allocation method based on total revenues of individual products.

b. The incremental revenue-alocation method, with Innocence ranked 1; Desarmer, 2; and Fraiche, 3, based on retail prices of individual products. According to this ranking, the primary product in a suite has the highest rank, and so on

2. Recalculate the allocation using the Shapley and the weighted Shapley value methods. What method would you recommend and why?

Answer 1

Petale Parfum (PP) The stand-alone method of revenue-allocation used for specific product figures of the products in the suite of its weights for allocating the suite revenues to the particular products. The incremental revenue allocation method ranks individual products in a suite. According to this the product in the suite with the maximum sales and then uses this method to allocate suite revenues to the particular product. Assume that all three perfumes are sold in suite as $400 By using Stand-alone revenue allocation method based on total revenues of individual products as follows: Prices Retail Price Retail price as % of total (400) Allocation of Bundled selling price Units sold Allocation of Revenue Fraiche Desamer Innocence Total 110 88 275 473 23.26 18.6 58.14 100 92 76 400 20000 37500 20000 77500 1840000 2850000 4640000 31000000 232 The incremental revenue allocation method as follows by using excel table: Prices Fraiche 110 Innocence Desamer 275 88 275 20000 37500 5500000 4687500 Retail Price Allocation of Bundled selling price Units sold Allocation of Revenue 125 Total 473 400 77500 10187500 20000 The allocation using weighted Shapley method: Prices 275 88 Retail Price Allocation of bundle selling price when Innocence Rank 1 Allocation of bundle selling price when Desamer Rank 1 Allocation of bundle selling price when Fraiche Rank 1 Innocence Desamer Fraiche 110 275 125 0 0 88 312 290 110 Total 473 400 400 400 O If there is no clear suggestion of which product is the important product, or, if it can be practically assumed that the three products are equally significant to the company's plan, the Shapley value method is the simplest and fairest of all the methods because it averages the effect of product ranks. In this case, the allocations from the value method. The stand-alone method does not need ranking the products in the suite.