Question

Beaumont Company enters into a contract to provide a high quality diving-certification preparation package, including goggles, snorkels, air tanks, fins, a wetsuit, and 5 private lessons to get ready for diving certifications. The entire package sells for $2,500.

Other competing sellers in the same region charge an average of $250 for a set of goggles and $750 for the lessons, if sold separately. Beaumont Company usually sells at a 5% discount compared to other shops, since it is a bit farther away from the ocean.

1. Required: What would be Beaumont’s stand-alone selling price of the goggles and the lessons, based on adjusted market assessment approach? Show computations.

2. Typically, Beaumont incurs $375 on compensation and other costs to provide the private lessons, and earns an average of 40% profit over cost on service offerings. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the certified lessons based on the expected cost plus margin approach. Show computations

3. Typically, if Beaumont were to sell the equipment only, it would ask for $2,000. Required: Assuming that the diving equipment and the certification lessons are separate performance obligations, estimate the stand-alone selling price of the lessons based on the residual approach. Show computations.

Answer 1

Required 1
Beaumont's Stand alone selling price of the googles and the lessons based on adjusted market assessment approach
Stand alone selling price of googles in the market	$250
Discount offered by Beaumont	5%
Beaumont's Stand alone selling price of the googles	$237.50	(250-12.50)
Stand alone selling price of lessons in the market	$750
Discount offered by Beaumont	5%
Beaumont's Stand alone selling price of the googles	$712.50	(750-37.50)
Required 2
Stand-alone price of the certificate lessons based on the expected cost plus margin approach
Cost of compensation and other cost	$375
Mark up percentage	40%
Mark up	$150	(375 x 40%)
Stand-alone price of the certificate lessons	$525	(375+150)
Required 3
Stand-alone price of the certificate lessons based on the residual approach
Entire package selling price	$2,500
Stand-alone price of the equipments	$2,000
Stand-alone price of the lessons	$500	(2500-2000)