Revenue allocation, bundled products. Athletic Programs (AP) sells exercise videos through television infomercials. It uses a well-known sporting celebrity in each video.

Each celebrity receives a share (typically varying between 10% and 25%) of the VAR|ANCESREaVnd customer revenues from sale of that video.

In recent months, AP has started selling its exercise videos in bundled form as well as in individual form. Typically, the bundled products are offered to people who telephone for a specific video after watching an infomercial. Each infomercial is for a specific exercise tape.
As a marketing experiment, AP has begun advertising the bundled product at the end ofsome infomercials in a select set of markets.
Sales in 2007 of three products that have been sold individually, as well as in bundled form, are as follows:
Average Retail Price Net Units Sold Royalty Paid to Celebrity Individual sales:
SuperAbs $42 27,000 15%
SuperArms $37 O 25%
SuperLegs $27 20,000 18%
Bundled product sales:
SuperAbs + SuperArms $62 18,000 ?
SuperAbs + SuperLegs $54 6,000 p SuperArms + SuperLegs $44 11,000 ?
SuperAbs + SuperArms + SuperLegs $67 22,000 ?
The AP infomercials have received widespread recognition.
Required 1. What royalty would be paid to the celebrity on each tape for the individual sales in 2007?
2. What royalty would be paid to each celebrity for the bundled product sales in 2007 using

a. The stand-alone revenue-allocation method (with average retail price as the weight)?

b. The incremental revenue-allocation method (with SuperArms ranked 1, SuperAbs 2, and SuperLegs 3)?
3. Discuss the relative merits ofthe two revenue-allocation methods in requirement 2.
4. Assume the incremental revenue-allocation method is used. What alternative approaches could be used to determine the sequence in which the bundled revenue could be allocated 8 to individual products?