Reference no: EM132321968
Problem - Bundled Products and Revenue Allocation Methods
Fabulous Hotels (FH) operates a five-star hotel with a championship golf course. FH has a decentralized management structure, with three divisions:
- Lodging (rooms, conference facilities)
- Food (restaurants and in-room service)
- Recreation (golf course, tennis courts, swimming pool, etc)
Starting to next month, FH will offer a two-day, two-person "getaway package" for $1,000 This deal includes the following:
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Two nights stay for two in an ocean-view room
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$ 800
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Two rounds of golf (can be used by either guest)
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$ 375
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Candlelight dinner for two at FH's finest restaurant
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$ 200
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Total package value
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$ 1,375
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Jenny Lee, president of the recreation division, recently asked the CEO of ER how her division would share in the $1,000 revenue from the gateway package. The golf course was operating at 100% capacity. Currently, anyone booking the package was guaranteed access to the golf course.
Lee noted that every "gateway" booking would displace $275 of other golf bookings not related to the package. She emphasized that the high demand reflected the devotion of her team to keeping the golf course rated one of the best "Best 10 Courses in the World" by Goff Monthly. As an aside, she also noted that the lodging and food divisions had to run away customers during only "peak season events such as the New Year's period".
1. Using selling price, allocate the $1,000 gateway-package revenue to the three divisions using:
a. The stand-alone revenue-allocation method
b. The incremental revenue-allocation method (with recreation first, then lodging, and then food)