Stellar Appliance Center is an experienced home appliance dealer. Stellar Applia
ID: 2555477 • Letter: S
Question
Stellar Appliance Center is an experienced home appliance dealer. Stellar Appliance Center also offers a number of services for the home appliances that it sells. Assume that Stellar Appliance Center sells ovens on a standalone basis. Stellar Appliance Center also sells installation services and maintenance services for ovens. However, Stellar Appliance Center does not offer installation or maintenance services to customers who buy ovens from other vendors. Pricing for ovens is as follows.
In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $160. Additionally, the incremental amount charged by Stellar Appliance Center for installation approximates the amount charged by independent third parties. Ovens are sold subject to a general right of return. If a customer purchases an oven with installation and/or maintenance services, in the event Stellar Appliance Center does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $820.
Assume that a customer purchases an oven with both installation and maintenance services for $980.
(b) Indicate the amount of revenue that should be allocated to the oven, the installation, and to the maintenance contract.
Explanation / Answer
If the oven with installation would have been sold as pe the market pricing, the rate for oven plus installation and maintenance services would be -
Oven - $820
Installation - $20
Maintenance - $160
Total $1000
However the same is sold at $980
Thus, the portion of revenue for oven, installation and maintenance services should be calculated as below:
Oven = $820/$1000*$980 = $803.60
Installation = $20/$1000*$980 = $19.60
Maintenance = $160/$1000*$980 = $156.80
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