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

The range of possible prices is determined as follows:
Reference value ≤ Value-based price ≤ EVC
EVC = Reference value + Differentiation value
The reference value is the price of the competing alternative, which in this case is $129,000.
The differentiation value has two components. First, customers who purchase a QJ-47 rather than the competing alternative would avoid the need to buy four industrial grinders for $129,000 rather than just one QJ-47 to achieve 120,000 hours of service. This is a savings of $387,000 (= 3 × $129,000) for the additional industrial grinders that would have to be purchased. Second, customers who purchase a QJ-47 rather than the competing alternative would realize operating cost savings computed as follows:
 11ea7761_164e_8962_81a5_4340a833af96_TB2580_00 Differentiation value = $387,000 + $36,000 = $423,000
EVC = Reference value + Differentiation value = $129,000 + $423,000 = $552,000
Reference value ≤ Value-based price ≤ EVC
$129,000 ≤ Value-based price ≤ $552,000

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