(Multiple-Deliverable Arrangement)
Apple Core is an experienced technology retailer. Apple Core also offers a number of services together with the electronic items that it sells. Assume that Apple Core sells home entertainment systems on a standalone basis. Apple Core also sells installation services and maintenance services for the entertainment systems. However, Apple Core does not offer installation or maintenance services to customers who buy entertainment systems from other vendors. Pricing for one
entertainment systems is as follows.
Entertainment system only $ 2,000
Entertainment system with installation service 2,150
Entertainment system with maintenance services 2,225
Entertainment system with installation and maintenance services 2,300
In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $225. Additionally, the incremental amount charged by Apple Core for installation approximates the amount charged by independent third parties. Entertainment systems are sold subject to a general right of return. If a customer purchases an entertainment system with installation and/or maintenance services, in the event Apple Core does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $2,000.
Instructions
(a) Assume that a customer purchases an entertainment system with both installation and maintenance services for $2,300. Based on its experience, Apple Core believes that it is probable that the installation of the equipment will be performed satisfactorily to the customer. Assume that the maintenance services are priced separately. Explain whether the conditions for a multiple-deliverable
arrangement exist in this situation.
(b) Indicate the amount of revenues that should be allocated to the entertainment system, the installation, and to the maintenance contract.