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 range of possible prices should Shoun consider when setting a price for QJ-47?
A) $423,000 ≤ Value-based price ≤ $552,000
B) $129,000 ≤ Value-based price ≤ $201,000
C) $129,000 ≤ Value-based price ≤ $552,000
D) $201,000 ≤ Value-based price ≤ $423,000

Question

Quizplus · Accepted Answer

Value-based pricing is a pricing strategy where the price is based on how much the customer values the product rather than its cost of production. In this case, Shoun's new industrial grinder-model QJ-47 has a much longer useful life and lower operating costs compared to the competitor's product. Therefore, customers would value Shoun's product more and would be willing to pay a higher price for it.

To calculate the value-based price range, we need to find the net present value of the cost savings generated by Shoun's product compared to the competitor's product, and add it to the competitor's selling price.

The net present value (NPV) of the cost savings generated by Shoun's product is:
NPV = (operating cost difference per hour) * (useful life difference in hours) * (discount rate)
NPV = ($0.90 - $0.60) * (120,000 - 30,000) * (10%)
NPV = $108,000

Adding the NPV to the competitor's selling price, we get:
Value-based price = $129,000 + $108,000
Value-based price = $237,000

However, this is only the lower bound of the price range, as it assumes that customers only value the cost savings generated by Shoun's product. The upper bound of the price range would be the total value that customers place on the longer useful life and lower operating costs of Shoun's product. This is harder to estimate, and would depend on factors such as the importance of uptime for the customer's operations, the perceived reliability of Shoun's product, and the level of competition in the market.

Therefore, the correct answer is C, as it includes the lowest possible value-based price (the competitor's price plus the net present value of cost savings) and the highest possible value-based price (which is unknown but could be much higher).

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