Conaghan Avionics Corporation has developed a new high pressure pump-model RA-79-that has been designed to outperform a competitor's best-selling high pressure pump. The competitor's product has a useful life of 30,000 hours of service, has operating costs that average $3.60 per hour, and sells for $159,000. In contrast, model RA-79 has a useful life of 60,000 hours of service and its operating cost is $2.00 per hour. Conaghan has not yet established a selling price for model RA-79. From a value-based pricing standpoint what is RA-79's economic value to the customer over its 60,000 hour useful life?
A) $414,000
B) $267,000
C) $255,000
D) $279,000

Question

Quizplus · Accepted Answer

The economic value is calculated by comparing the total cost of ownership of both products. The competitor's pump costs $159,000 plus $108,000 in operating costs (30,000 hours x $3.60/hour), totaling $267,000 for 30,000 hours. For 60,000 hours, it would be $534,000. RA-79 has operating costs of $120,000 (60,000 hours x $2.00/hour). The economic value is $534,000 - $120,000 = $414,000.

Conaghan Avionics Corporation Has Developed a New High Pressure Pump-Model