allocating revenues

Allocating Revenues

Bundlingof products gives rise to

revenue-allocation issues.

Revenues and Bundled Products

A bundled product is a package of two or moreproducts (or services) sold for a single price.

Bundled product sales are also referred toas “suite sales.”

The individual components of the bundle alsomay be sold as separate items at their own

“stand-alone” prices.

Revenues and Bundled ProductsWhat businesses provide bundled products?

Banks Hotels Tours Checking Safety deposit boxes Investment advisory

Lodging Food and beverage services Recreation

Transportation Lodging Guides

Revenue Allocation Methods

English Languages Institute buys Englishlanguage software programs and

then sells them in Mexico and Central America.English sells the following programs:

Grammar, Translation, and CompositionThese programs are offered stand-alone

or in a bundle.

Revenue Allocation Methods

Stand-alone PriceGrammar $255Translation $ 85Composition $185

Purchasing these softwareprograms costs English

the following:Grammar $180Translation $ 45Composition $ 95

Revenue Allocation Methods

Bundle (Suites) PriceGrammar + Translation $290Grammar + Composition $350Grammar + Translation + Composition$410

Revenue Allocation Methods

The two main revenue allocation methods are:

1. The stand-alonemethod

2. The incrementalmethod

Stand-Alone RevenueAllocation Method

There are four types of weights for thestand-alone revenue allocation method.

1. Selling prices 2. Unit costs

3. Physical units 4. Stand-aloneproduct revenues

Stand-Alone RevenueAllocation Method

Consider the Grammar and Translationsuite, which sells for $290.

How much weight should EnglishLanguages Institute assign to each item?

Stand-Alone Revenue Allocation Method

Selling prices:The individual selling prices are $255 for

Grammar and $85 for Translation.$255+85 = $340 total, so…Grammar: $255 ÷ $340 = 0.75,

$290 bundle SP × 0.75 = $217.50

Translation:$85 ÷ $340 = 0.25, $290 × 0.25 = $72.50

Stand-Alone RevenueAllocation Method

Unit costs:This method uses the costs of the individual

products to determine the weights for therevenue allocations.

Grammar:$180 ÷ $225 = 0.80, $290 × 0.80 = $232

Translation:$45 ÷ $225 = 0.20, $290 × 0.20 = $58

Stand-Alone RevenueAllocation Method

Physical units:This method gives each product unit in the

suite the same weight when allocatingsuite revenue to individual products.With two products in the suite, each

product is allocated 50% of suite revenues.1 ÷ (1 + 1) = 0.50

$290 × 0.50 = $145

Stand-Alone RevenueAllocation Method

Stand-alone product revenues:This method captures the quantity of eachproduct sold as well as their selling prices.

Assume that the stand-alone revenues in 2003are Grammar $734,400, Translation $81,600,

and Composition $133,200.What are the weights for the Grammar

and Translation suite?

Stand-Alone RevenueAllocation Method

Grammar:$734,400 ÷ $816,000 = 0.90, $290 × 0.90 = $261

Translation:$81,600 ÷ $816,000 = 0.10, $290 × 0.10 = $29

Stand-Alone RevenueAllocation Method

Revenue Allocation Weights Grammar Translation

Selling prices $217.50 $ 72.50Unit costs 232.00 58.00

Physical units 145.00 145.00Stand-alone product revenues 261.00 29.00

Incremental RevenueAllocation Method

The first-ranked product is termed theprimary product in the bundle.

The second-ranked product is termedthe first incremental product.

The third-ranked product is the secondincremental product, and so on.

Incremental RevenueAllocation Method

Assume that Grammar is designatedas the primary product.

If the suite selling price exceeds the stand-alone price of the primary product, the

primary product is allocated 100%of its stand-alone revenue.

Incremental RevenueAllocation Method

Grammar and Translation suite selling price= $290 per day

Allocated to Grammar: $255Remaining to be allocated: ($290 – $255) = $35

Allocated to Translation: $35

The End