Oshawa Motors is a car dealership that has two types of operations: car sales and service. The two divisions operate independently and, in fact, the showroom for car sales is entirely separate from the service shop. (They are across the street from each other.) Despite the independence of the two divisions, the company provides incentives to its sales team to sell maintenance packages along with the sale of cars (new and used). Consider the following off er posted on one of the car windows:

As is typical in car sales, the price negotiated between the salesperson and the customer varies in each transaction, even for identical vehicles, and there is a considerable amount of latitude given to the salesperson to adjust the price to €œclose the deal.€ In one such transaction for the above car including the premium service package, the final negotiated price was $45,900.

Required:
a. Assume that the three prices (for car, basic service package, increment for premium service package) reliably reflect the stand-alone selling price of these items. Compute the revenue that should be recorded on the date of delivery of the car and for each of the next four years.
b. Similar to part (a), assume that the component prices reliably reflect their fair values, except that the premium package (basic + increment for premium) should be considered together for a price of $5,000. Compute the revenue that should be recorded on the date of delivery of the car and for each of the next four years.
c. The service shop also offers the service packages to other car owners regardless of where they purchased their vehicles. The established price for the basic package is $1,500 and for the premium package is $3,300 (meaning the increment is $1,800 to upgrade from the basic to the premium package). Actual sale prices of the car itself are difficult to obtain due to various customizations that buyers demand, so it is only possible to determine a range of prices, from $42,000 to $46,000. Based on these assumed facts, determine the amount of revenue that should be recorded upon delivery of the car.

Transcribed Image Text:

Price Car $45,000 3,000 Basic service package (2 years) Increment for premium service package (4 years) Total 2,000 50,000 Special offer for car + premium service 47,500 You save $ 2,500