Ed and Steve are students at Berkeley College They share an

Ed and Steve are students at Berkeley College. They share an apartment that is owned by Steve.

Steve is considering subscribing to an Internet provider that has the following packages available:

Package

Per Month

A.

Internet access

$60

B.

Phone services

15

C.

Internet access + phone services

70

Ed spends most of his time on the Internet (\"everything can be found online now\"). Steve prefers to spend his time talking on the phone rather than using the Internet (\"going online is a waste of time\"). They agree that the purchase of the $70 total package is a \"win–win\" situation.

Requirements

1.

Allocate the $70 between Ed and Steve using (a) the stand-alone cost-allocation method, (b) the incremental cost-allocation method, and (c) the Shapley value method.

2.

Which method would you recommend they use and why?

Solution

Answer

Stand-Alone Method

Share = [Individual Cost / (Total Individual cost of services)] * Discounted Cost (i.e. special plan)

Ed share = [60 / (60+15)] * 70

Ed share = $56

Steve share = [15 / (60+15)] * 70

Steve share = $14

Incremental Cost-Allocation Method

In this method, the Incremental user borne the full individual cost and Primary user pays the remaining of Discounted plan price

Steve Share = $15

Ed Share = $55 (70-15)

Ed Share = $60

Steve Share = $10 (70-60)

Shapley Value Method

Share = Average of Incremental method allocation

Ed Share = (55 + 60) / 2

Ed Share = $57.5

Steve Share = (15 + 10) / 2

Steve Share = $12.5

Part B

In my opinion Stand-Alone method is recommended as in this method the Customer is paying the fair share of his cost. i.e. In the same proportionate if they have opted for Individual plans.