Question

Ed and Steve are students at Berkeley College. They share an apartment that is owned by Steve.

Steve is considering subscribing to an Internet provider that has the following packages​ available:

Package		Per Month
A.	Internet access		$60
B.	Phone services		15
C.	Internet access + phone services		70

Ed spends most of his time on the Internet​ ("everything can be found online​ now"). Steve prefers to spend his time talking on the phone rather than using the Internet​ ("going online is a waste of​ time"). They agree that the purchase of the $70 total package is a "win–win" situation.

Requirements

1.	Allocate the $70 between Ed and Steve using​ (a) the​ stand-alone cost-allocation​ method, (b) the incremental​ cost-allocation method, and​ (c) the Shapley value method.
2.	Which method would you recommend they use and​ why?

Answer 1

Answer

Stand-Alone Method

Share = [Individual Cost / (Total Individual cost of services)] * Discounted Cost (i.e. special plan)

Ed share = [60 / (60+15)] * 70

Ed share = $56

Steve share = [15 / (60+15)] * 70

Steve share = $14

Incremental Cost-Allocation Method

In this method, the Incremental user borne the full individual cost and Primary user pays the remaining of Discounted plan price

1. When El is the primary user and Steve is Incremental User

Steve Share = $15

Ed Share = $55 (70-15)

1. When Steve is the primary user and Ed is Incremental User

Ed Share = $60

Steve Share = $10 (70-60)

Shapley Value Method

Share = Average of Incremental method allocation

Ed Share = (55 + 60) / 2

Ed Share = $57.5

Steve Share = (15 + 10) / 2

Steve Share = $12.5

Part B

In my opinion Stand-Alone method is recommended as in this method the Customer is paying the fair share of his cost. i.e. In the same proportionate if they have opted for Individual plans.