Question

Eytchison Industrial Products Inc. has developed a new industrial grinder, model OK-23, that is designed to offer superior performance to a comparable grinder sold by Eytchison’s main competitor. The competing grinder sells for $52,000 and needs to be replaced after 1,000 hours of use. It also requires $9,800 of preventive maintenance during its useful life. Model OK-23’s performance capabilities are similar to the competing grinder with two important exceptions—it needs to be replaced only after 3,000 hours of use and it requires $19,600 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint what is model OK-23’s economic value to the customer over its 3,000 hour life?

Answer 1

The competing grinder sells for $52,000 and needs to be replaced after 1,000 hours of use. It also requires $9,800 of preventive maintenance during its useful life
Cost per hour under competing grinder
Purchase price	52,000
Preventive maintenance	9,800
Total cost	61,800
Divided by: useful life in hours	1,000
Cost per hour under competing grinder	$          61.80
Model OK-23’s performance capabilities are similar to the competing grinder with two important exceptions—it needs to be replaced only after 3,000 hours of use and it requires $19,600 of preventive maintenance during its useful life.
Cost of 3000 hours (61.80*3000)	185,400
Less : preventive maintenance	19,600
Economic cost of purchased of Model OK-23	165,800
From a value-based pricing standpoint what is model OK-23’s economic value to the customer over its 3,000 hour life?
Value-based pricing of Model OK-23	165,800