Chapter 17, Problem 20E

Assume the same facts as in E17-19, except that Rix cannot directly observe the stand-alone selling prices of the installation and service contracts. However, Rix has determined that the cost of the installation services is $150 and historical margins relative to cost average 20%. Therefore, Rix estimates the stand-alone selling price of the installation services using an expected cost plus a margin approach.

Rix decides to use an adjusted market assessment approach to estimate the selling price of the service contract. Rased on information obtained from competitors, Rix determines the average selling price of a similar service contract to be $350. Rix believes that it has a higher cost structure than its competitors and that it should increase this estimate by 10% to achieve an acceptable margin.

Required:

1. 1. Determine the stand-alone selling price of each good or service.
2. 2. How should the transaction price be allocated among the products? (Round your answer to the nearest dollar.)

To determine

Ascertain the stand-alone selling price of each good or service.

Explanation of Solution

Stand-alone selling price:

The “stand-alone selling price” is the price at which promised goods and services is sold individually to a customer. If the “stand-alone selling price” is not identifiable, then the company must use its best estimate to sell goods and services separately.

Stand-alone selling price of each good or service:

Good or service	Amount
Dishwasher	$1,000
Installation	(1)$180
Service contract	(2)$385
Total	$1,565

Table (1)

Working notes:

(1)Calculate the stand-alone selling price for installation:

$\begin{array}{c}\begin{array}{l}\text{Stand-alone}\text{selling}\\ \text{price}\text{for}\text{installation}\end{array}\}\text{=}\left[\begin{array}{l}\text{Transaction}\text{price}\text{for}\text{installation}\text{+}\\ \left(\begin{array}{l}\text{Transaction}\text{price}\text{for}\text{installation}\text{×}\\ \text{Percentage}\text{of}\text{average}\text{cost}\text{of}\text{installation}\end{array}\right)\end{array}\right]\\ \text{=}\left[\text{\$150}\text{+}\left(\text{\$}\text{150}\text{×}\text{20\%}\right)\right]\\ \text{=\$150+}\text{\$30}\\ \text{=\$180}\end{array}$

(2)Calculate the stand-alone selling price for service contract:

$\begin{array}{c}\begin{array}{l}\text{Stand-alone}\text{selling}\\ \text{price}\text{for}\text{service}\text{contract}\end{array}\}\text{=}\left[\begin{array}{l}\text{Transaction}\text{price}\text{for}\text{service}\text{contract}\text{+}\\ \left(\begin{array}{l}\text{Transaction}\text{price}\text{for}\text{service}\text{contract}\text{×}\\ \text{Percentage}\text{of}\text{average}\text{cost}\text{of}\text{service}\text{contract}\end{array}\right)\end{array}\right]\\ \text{=}\left[\text{\$350}\text{+}\left(\text{\$}\text{350}\text{×}\text{10\%}\right)\right]\\ \text{=\$350+}\text{\$35}\\ \text{=\$385}\end{array}$

To determine

State the manner in which the transaction price must be allocated among the products.

Explanation of Solution

Transaction price:

Transaction price is the amount of consideration that is estimated by the company to be authorized in exchange, for delivering the promised goods and services to the customer. Transaction price is examined by the seller by analyzing the terms of the contract and the normally conducts of the business

Calculate the transaction price for dishwasher:

$\begin{array}{c}\begin{array}{l}\text{Transaction}\text{price}\\ \text{for}\text{dishwasher}\end{array}\}\text{=}\left[\begin{array}{l}\text{Price}\text{charged}\text{to}\text{the}\text{customer}\\ \text{×}\frac{\text{Stand-alone}s\text{elling}\text{price}\text{of}\text{dishwasher}}{\text{Total}\text{stand-alone}\text{selling}\text{price}}\end{array}\right]\\ \text{=}\text{\$1,400}\text{×}\frac{\text{\$1,000}}{\text{\$1,565}}\\ \text{=}\text{\$895}\end{array}$

Therefore, the transaction price for dishwasher is $895.

Calculate the transaction price for installation:

$\begin{array}{c}\begin{array}{l}\text{Transaction}\text{price}\\ \text{for}\text{installation}\end{array}\}\text{=}\left[\begin{array}{l}\text{Price}\text{charged}\text{to}\text{the}\text{customer}\\ \text{×}\frac{\text{Stand-alone}\text{selling}\text{price}\text{of}\text{installation}}{\text{Total}\text{stand-alone}\text{selling}\text{price}}\end{array}\right]\\ \text{=}\text{\$1,400}\text{×}\frac{\text{\$180}\text{(1)}}{\text{\$1,565}}\\ \text{=}\text{\$161}\end{array}$

Therefore, the transaction price for installation is $161.

Calculate the transaction price for service contract:

$\begin{array}{c}\begin{array}{l}\text{Transaction}\text{price}\\ \text{for}\text{service}\text{contract}\end{array}\}\text{=}\left[\begin{array}{l}\text{Price}\text{charged}\text{to}\text{the}\text{customer}\\ \text{×}\frac{\text{Stand-alone}\text{selling}\text{price}\text{of}\text{service}\text{contract}}{\text{Total}\text{stand-alone}\text{selling}\text{price}}\end{array}\right]\\ \text{=}\text{\$1,400}\text{×}\frac{\text{\$385}\text{(2)}}{\text{\$1,565}}\\ \text{=}\text{\$344}\end{array}$

Therefore, the transaction price for service contract is $344.

Note: $1,600=$\$1,000+\$200+\$400$ and refer to 19E for the values of amount.