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.”
The individual components of the bundle also
may be sold as separate items at their own
“stand-alone” prices.
Revenues and Bundled Products
What businesses provide bundled products?
Banks
Checking
 Safety
deposit boxes
 Investment
advisory

Hotels
Lodging
 Food and
beverage
services
 Recreation

Tours
Transportation
 Lodging
 Guides

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.
Revenue Allocation Methods
Stand-alone
Grammar
Translation
Composition
Price
$255
$ 85
$185
Purchasing these software
programs costs English
the following:
Grammar
$180
Translation
$ 45
Composition
$ 95
Revenue Allocation Methods
Bundle (Suites)
Grammar + Translation
Grammar + Composition
Grammar + Translation + Composition
Price
$290
$350
$410
Revenue Allocation Methods
The two main revenue allocation methods are:
1. The stand-alone
method
2. The incremental
method
Stand-Alone Revenue
Allocation 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
Stand-Alone Revenue
Allocation Method
Consider the Grammar and Translation
suite, which sells for $290.
How much weight should English
Languages 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 Revenue
Allocation 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
Stand-Alone Revenue
Allocation 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
Stand-Alone Revenue
Allocation 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?
Stand-Alone Revenue
Allocation 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 Revenue
Allocation Method
Revenue Allocation Weights
Grammar Translation
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
Incremental Revenue
Allocation Method
The first-ranked product is termed the
primary product in the bundle.
The second-ranked product is termed
the first incremental product.
The third-ranked product is the second
incremental product, and so on.
Incremental Revenue
Allocation Method
Assume that Grammar is designated
as the primary product.
If the suite selling price exceeds the standalone price of the primary product, the
primary product is allocated 100%
of its stand-alone revenue.
Incremental Revenue
Allocation 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