Olivier Industries Inc.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 has two elements. First, customers who purchase model AG-06 rather than the competing alternative would avoid the need to buy four of the competitor's instruments for $74,000 rather than just one AG-06 to achieve 4,000 hours of usage. This is a savings of $222,000 (=$74,000 × 3 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase AG-06 rather than the competing alternative would realize preventive maintenance savings computed as follows:
 11ea7761_1641_90e6_81a5_8dbb7d6d16e4_TB2580_00 Total differentiation value = $222,000 + $14,000 = $236,000