Question

Neakanie Industries sells specialized mountain bikes. Each specialized bike purchased includes free maintenance service for 12 months. The price of the specialized bike is $700. When sold separately, a maintenance contract is $200 and a comparable but non-specialized bike is $600. What amount of revenue will Neakanie recognize at the date of sale for each bike

Answer 1

Answer:

$525

Explanation:

Given that,

Each specialized bike purchased includes free maintenance service for 12 months,

Price of the specialized bike = $700

When sold separately,

Maintenance contract = $200

Comparable but non-specialized bike = $600

Total value = $200 + $600

                  = $800

The whole price of the specialized bike will be based on the ratio of maintenance contract and the individual prices of non specialized bikes.

Revenue from the sale of bike:

= Price of the specialized bike × (Price of non specialized bike ÷ Total amount)

= $700 × ($600 ÷ $800)

= $700 × 0.75

= $525