Question

Valmont Company has developed a new industrial piece of equipment called the XP-200. The company is considering two methods of establishing a selling price for the XP-200—absorption cost-plus pricing and value-based pricing.

Valmont’s cost accounting system reports an absorption unit product cost for XP-200 of $8,600. Its markup percentage on absorption cost is 85%. The company’s marketing managers have expressed concerns about the use of absorption cost-plus pricing because it seems to overlook the fact that the XP-200 offers superior performance relative to the comparable piece of equipment sold by Valmont’s primary competitor. More specifically, the XP-200 can be used for 11,000 hours before replacement. It only requires $1,200 of preventive maintenance during its useful life and it consumes $130 of electricity per 550 hours used.

These figures compare favorably to the competing piece of equipment that sells for $11,000, needs to be replaced after 5,500 hours of use, requires $2,400 of preventive maintenance during its useful life, and consumes $152 of electricity per 550 hours used.

Required:

1. If Valmont uses absorption cost-plus pricing, what price will it establish for the XP-200?

2. What is XP-200’s economic value to the customer (EVC) over its 11,000-hour life?

3. If Valmont uses value-based pricing, what range of possible prices should it consider when setting a price for the XP-200?

If Valmont uses absorption cost-plus pricing, what price will it establish for the XP-200?

What is XP-200’s economic value to the customer (EVC) over its 11,000-hour life?

	1. Selling price per unit 2. EVC

If Valmont uses value-based pricing, what range of possible prices should it consider when setting a price for the XP-200?

	Range of possible prices ≤ Value-based price ≤

Answer 1