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Allocating Revenues

Allocating Revenues. Bundling of products gives rise to revenue-allocation issues. Revenues and Bundled Products. A bundled product is a package of two or more products (or services) sold for a single price. Bundled product sales are also referred to as “suite sales.”.

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Allocating Revenues

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  1. Allocating Revenues Bundling of products gives rise to revenue-allocation issues.

  2. Revenues and Bundled Products A bundled productis a package of two or more products (or services) sold for a single price. Bundled product sales are also referred to as “suite sales.” The individual components of the bundle also may be sold as separate items at their own “stand-alone” prices.

  3. Revenues and Bundled Products What businesses provide bundled products? Banks Hotels Tours • Checking • Safety deposit boxes • Investment advisory • Lodging • Food and beverage services • Recreation • Transportation • Lodging • Guides

  4. Revenue Allocation Methods English Languages Institute buys English language software programs and then sells them in Mexico and Central America. English sells the following programs: Grammar, Translation, and Composition These programs are offered stand-alone or in a bundle.

  5. Revenue Allocation Methods Stand-alonePrice Grammar $255 Translation $ 85 Composition $185 Purchasing these software programs costs English the following: Grammar $180 Translation $ 45 Composition $ 95

  6. Revenue Allocation Methods Bundle (Suites)Price Grammar + Translation $290 Grammar + Composition $350 Grammar + Translation + Composition $410

  7. Revenue Allocation Methods The two main revenue allocation methods are: 1. The stand-alone method 2. The incremental method

  8. Stand-Alone RevenueAllocation Method There are four types of weights for the stand-alone revenue allocation method. 1. Selling prices 2. Unit costs 3. Physical units 4. Stand-alone product revenues

  9. Stand-Alone RevenueAllocation Method Consider the Grammar and Translation suite, which sells for $290. How much weight should English Languages Institute assign to each item?

  10. 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

  11. Stand-Alone RevenueAllocation Method Unit costs: This method uses the costs of the individual products to determine the weights for the revenue allocations. Grammar: $180 ÷ $225 = 0.80, $290 × 0.80 = $232 Translation: $45 ÷ $225 = 0.20, $290 × 0.20 = $58

  12. Stand-Alone RevenueAllocation Method Physical units: This method gives each product unit in the suite the same weight when allocating suite 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

  13. Stand-Alone RevenueAllocation Method Stand-alone product revenues: This method captures the quantity of each product sold as well as their selling prices. Assume that the stand-alone revenues in 2003 are Grammar $734,400, Translation $81,600, and Composition $133,200. What are the weights for the Grammar and Translation suite?

  14. 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

  15. Stand-Alone RevenueAllocation Method Revenue Allocation Weights GrammarTranslation Selling prices $217.50 $ 72.50 Unit costs 232.00 58.00 Physical units 145.00 145.00 Stand-alone product revenues 261.00 29.00

  16. Incremental RevenueAllocation Method The first-ranked product is termed the primary productin the bundle. The second-ranked product is termed the first incremental product. The third-ranked product is the second incremental product, and so on.

  17. Incremental RevenueAllocation Method Assume that Grammar is designated as 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.

  18. Incremental RevenueAllocation Method Grammar and Translation suite selling price = $290 per day Allocated to Grammar: $255 Remaining to be allocated: ($290 – $255) = $35 Allocated to Translation: $35

  19. The End

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