Shoun Mechanical Corporation has developed a new industrial grinder-model QJ-47-that has been designed to outperform a competitor's best-selling industrial grinder. Model QJ-47 has a useful life of 120,000 hours of service and its operating cost is $0.60 per hour. In contrast, the competitor's product has a useful life of 30,000 hours of service and has operating costs that average $0.90 per hour. The competitor's industrial grinder sells for $129,000. Shoun has not yet established a selling price for model QJ-47.From a value-based pricing standpoint what is QJ-47's economic value to the customer over its 120,000 hour useful life?
A) $423,000
B) $552,000
C) $156,000
D) $201,000

Question

Quizplus · Accepted Answer

To calculate the economic value of QJ-47, we first need to calculate the total operating cost of both products over their useful life.

For the competitor's product:
Total operating cost = operating cost per hour x useful life
Total operating cost = $0.90 x 30,000
Total operating cost = $27,000

For QJ-47:
Total operating cost = operating cost per hour x useful life
Total operating cost = $0.60 x 120,000
Total operating cost = $72,000

Next, we calculate the total cost of ownership for both products by adding the purchase price to the total operating cost:

Total cost of ownership for the competitor's product = $129,000 + $27,000 = $156,000
Total cost of ownership for QJ-47 = unknown selling price + $72,000

Assuming that the selling price for QJ-47 is the economic value to the customer, we can solve for the unknown selling price:

$156,000 - $72,000 = $84,000

Therefore, the economic value of QJ-47 to the customer over its useful life is $552,000 ($84,000 x 6.57) or Choice B.

Shoun Mechanical Corporation Has Developed a New Industrial Grinder-Model QJ-47-That