Question

WangWang

Inc. produces and sells DVDs to business people and students who are planning extended stays in

ChinaChina.

It has been very successful with two​ DVDs: Beginning

MandarinMandarin

and Conversational

MandarinMandarin.

It is introducing a third​ DVD, Reading

ChineseChinese

Characters. It has decided to market its new DVD in two different packages grouping the Reading

ChineseChinese

Characters DVD with each of the other two language DVDs. Required

LOADING...

Information about the separate DVDs and the packages follows.

DVD	Selling Price
Beginning Mandarin (BegM)		$48
Conversational Mandarin (ConM)		128
Reading Chinese Characters (RCC)		32
BegM + RCC		60
ConM + RCC		150

Requirement 1. Using the selling​ prices, allocate revenues from the

BegMBegM

​+

RCCRCC

package to each DVD in that package using​ (a) the​ stand-alone method,​ (b) the incremental​ method, and​ (c) the Shapley value method. ​(Round your answers to the nearest​ cent.)

	BegM	RCC
(a) Stand-alone
(b) Incremental
BegM primary user
RCC primary user
(c) Shapley . 1.Using the selling​ prices, allocate revenues from the BegMBegM ​+ RCCRCC package to each DVD in that package using​ (a) the​ stand-alone method,​ (b) the incremental​ method, and​ (c) the Shapley value method. 2. Using the selling​ prices, allocate revenues from the ConMConM ​+ RCCRCC package to each DVD in that package using​ (a) the​ stand-alone method;​ (b) the incremental​ method, in either​ order; and​ (c) the Shapley value method. 3. Which method is most appropriate for allocating revenues among the​ DVDs? Why?

Answer 1

1) a) Stand Alone method for allocation of the BegM + RCC​ package

DVD (A)	Separate Revenue (B)	Percentage (C = B/80)	Joint Revenue (D)	Allocation (E = D*C)
BegM	48	(48/80) = 0.60	60	36
RCC	32	(32/80) = 0.40	60	24
	80			60

b) Incremental Method

i)

DVD	Allocated Revenue (BegM first)	Revenue remaining to allocate
BegM	$48	($60-$48) = $12
RCC	$12

ii)

DVD	Allocated Revenue (RCC first)	Revenue remaining to allocate
RCC	$32	($60-$32) = $28
BegM	$28

c) Shapley Method (assuming each DVD is demanded in equal proportion)

i) BegM = ($48+$28)/2 = $38

ii) RCC = ($12+$32)/2 = $22

2) a) Stand Alone method for allocation of the ConM + RCC​ package

DVD (A)	Separate Revenue (B)	Percentage (C = B/160)	Joint Revenue (D)	Allocation (E = D*C)
ConM	128	(128/160) = 0.80	150	120
RCC	32	(32/160) = 0.20	150	30
	160			150

b) Incremental Method

i)

DVD	Allocated Revenue (ConM first)	Revenue remaining to allocate
ConM	$128	($150-$128) = $22
RCC	$22

ii)

DVD	Allocated Revenue (RCC first)	Revenue remaining to allocate
RCC	$32	($150-$32) = $118
ConM	$118

c) Shapley Method (assuming each DVD is demanded in equal proportion)

i) ConM = ($128+$118)/2 = $123

ii) RCC = ($22+$32)/2 = $27

3) For each DVD package, stand alone method and shapley method give approximately the same allocation to each DVD. These methods are fair if the demand for the DVDs is approximately equal. The stand alone method might be preferable because it is simpler and easier to explain.

The incremental method would be appropriate if one DVD has a higher level of demand than the other DVD. In this situation, the dominant DVD would be sold anyway, so it should receive its stand alone revenue, and the other DVD should receive the remainder.