Olivier Industries Incorporated has developed a new instrument, model AG-06, that is designed to offer superior performance to a comparable instrument sold by Olivier's main competitor. The competing instrument sells for $74,000 and needs to be replaced after 1,000 hours of use. It also requires $7,000 of preventive maintenance during its useful life. Model AG-06's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 4,000 hours of use and it requires $14,000 of preventive maintenance during its useful life.From a value-based pricing standpoint what is the differentiation value offered by model AG-06 relative to the competitor's offering for each 4,000 hours of usage?
A) $296,000
B) $102,000
C) $236,000
D) $14,000

Question

Quizplus · Accepted Answer

The differentiation value offered by Model AG-06 relative to the competitor's offering for each 4,000 hours of usage is the sum of the cost savings and the additional revenue earned by the customer from the extended lifespan of Model AG-06 compared to the competitor's product. The cost savings is the difference between the maintenance costs of the two products, which is $14,000 - $7,000 = $7,000. The additional revenue is the revenue earned by the customer for the additional 3,000 hours of usage that Model AG-06 provides compared to the competitor's product. This is calculated as the difference between the price of the competitor's product and the price of Model AG-06, multiplied by the number of additional hours provided by Model AG-06, which is ($74,000 - price of Model AG-06) x 3,000 = ($74,000 - price of Model AG-06) x 4. Therefore, the differentiation value offered by Model AG-06 relative to the competitor's offering for each 4,000 hours of usage is $7,000 + ($74,000 - price of Model AG-06) x 4. Solving for the price of Model AG-06, we get $296,000. Therefore, the answer is C.

Olivier Industries Incorporated Has Developed a New Instrument, Model AG-06