Question

Company D enters into a contract with a customer to sell Products W, X, Y, and Z for a price of $150,000. None of these products are sold together in smaller bundles. Company D regularly sells product W for $40,000 and Product X for $50,000. Company D is aware that other companies sell Product Y for $20,000. Product Z is a new product and there are no other companies selling this product. Company D knows that Product Z costs them $40,000 to produce and their normal markup on other similar products is 25% of cost.

How should Company D allocate the transaction price to the performance obligations of this contract? What is the justification for your answer?

Answer 1

Here allocation of transaction price is to be done on the basis of sales value of each product.
Sales value of W = $40,000
Sales value of X = $50,000
Sales value of Y = $20,000
Sales value of Z = ($40,000 + 25% * $40,000) = $50,000
Total sales value = $160,000

Contract price = $150,000
Allocation is done proportionately on the basis of individual sales value.
Transaction price to be allocated as:
W = $150,000 * $40,000 / $160,000 = $37,500
X = $150,000 * $50,000 / $160,000 = $46,875
Y = $150,000 * $20,000 / $160,000 = $18,750
Z = $150,000 * $50,000 / $160,000 = $46,875
Total price = $150,000

As all the products are provided in combination the contract price is less than the total of individual selling prices hence we have to proportionately allocate the transaction price to each product on the basis of individual sales value.