Stand-Alone Revenue-Allocation Method

The stand-alone revenue-allocation method uses product-specific information on the products in the bundle as weights for allocating the bundled revenues to the individual products. The term stand-alone refers to the product as a separate (nonsuite) item. Consider the Word + Finance suite which sells for $280 and assume Dynamic Software sells equal quantities of WordMaster and FinanceMaster. Three types of weights for the stand-alone method are as follows:

1. 1. SELLING PRICES. Using the individual selling prices of $125 for WordMaster and $225 for FinanceMaster, the weights for allocating the $280 suite revenues between the products are as follows:

1. 2. UNIT COSTS. This method uses the costs of the individual products (in this case, manufacturing cost per unit) to determine the weights for the revenue allocations.

1. 3. PHYSICAL UNITS. This method gives each product unit in the suite the same weight when allocating suite revenue to individual products. Therefore, with two products in the $\text{Word}+\text{Finance suite,}$ each product is allocated 50% of the suite revenues.

These three approaches to determining weights for the stand-alone method result in very different revenue allocations to the individual products:

Which method do managers prefer? The selling prices method is best because the weights explicitly consider the prices customers are willing to pay for the individual products. Weighting approaches that use revenue information better capture “benefits received” by customers than unit costs or physical units.^* The physical-units revenue-allocation method is used when managers cannot use any of the other methods (such as when selling prices are unstable or unit costs are difficult to calculate for individual products).^*