Athletic Programs (AP) sells exercise DVDs through television infomercials. It uses a well-known sports celebrity in each DVD. Each celebrity receives a share (typically varying between 10% and 25%) of the revenue from the sale of their DVD. In recent months, AP has started selling its exercise DVDs in bundled form as well as in individual form. Typically, the bundled products are offered to people who telephone for a specific DVD after watching an infomercial. Each infomercial is for a specific exercise DVD. As a marketing experiment, AP has begun to advertise the bundled product at the end of some infomercials in a select set of markets. Sales in 2013 of three DVDs that have been sold individually, as well as in bundled form, are as follows:

REQUIRED
1. What royalty would be paid to the celebrity on each DVD for the individual sales in 2013?
2. What royalty would be paid to each celebrity for the bundled product sales in 2013 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 ranked 2, and Super Legs ranked 3)?
3. Discuss the relative merits of the 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 to individual products?

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Average Retail Price Net Units Sold Royalty Paid to Celebrity Individual sales: SuperAbs SuperArms SuperLegs $42 %37 S27 27,000 53,000 20,000 15% 25% 18% Bundled product sales SuperAbs SuperArms SuperAbs+SuperLegs SuperArms SuperLegs SuperAbs SuperArms+ SuperLegs $62 S54 $44 $67 18,000 6,000 11,000 22,000