Question

Mott Company purchases a machine from Janelle Company. Installation of the machine requires specialized knowledge that Mott Company does not possess. Janelle Company regularly includes installation as part of its sales contracts. The machine has a stand-alone price of $50,000, and the value of the installation is estimated to be $5,000. Mott agrees to purchase the machine for $50,000. How much of the contract price should be allocated to the machine and installation respectively

Answer 1

Answer:

$45,455  and $4,545

Explanation:

Given that

The machine stand alone price = $50,000

Value of the installation = $5,000

Agreed purchase value of the machine = $50,000

So, by considering the above information, the contract price allocated  to machine is

Contract Price allocated to Machine = Total Contract price × Standalone price ÷ (Standalone price of machine + installation value)

= $50,000 × $50,000 ÷ $55,000

= $45,455

And for installation , it is

Contract Price allocated to Installation

= $50,000 × $5,000 ÷ $55,000

= $4,545