Case Study 2

Exclusive Resorts, Revenue allocation and Bundled Products

Exclusive Resorts (ER) operates a five-star hotel with a championship golf course. ER 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 next month, ER will offer a two-day, two-person "getaway package" for $1,000. This deal includes the following:

As Priced Separately

Two nights' stay for two in an ocean-view room $800 ($400 per night)

Two rounds of golf (can be used by either guest) $375 ($187.50 per round)

Candlelight dinner for two at ER's finest restaurant$200 ($100 per person)

Total package value$1,375

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 getaway 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 "getaway" booking would displace $375 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 10 Courses in the World" by Golf Monthly. As an aside, she also noted that the lodging and food divisions had to turn away customers during only "peak-season events such as the New Year's period."

Required:

1. Using selling prices, allocate the $1,000 getaway-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)

2. What are the pros and cons of the two methods in requirement 1?