Question

In: Accounting

A competitor sells a tractor for $14,000. Your company has been working on a new product...

A competitor sells a tractor for $14,000. Your company has been working on a new product to enter the market and your marginal cost is $8500. Your new tractor is superior in some ways and is inferior in other ways. It is slower so its rela tive value is decreased by $1000 but it requires less maintenance, which is worth $3500 per tractor. 1) What is the price of the nearest comparable alternative product to your tractor? 2) What is the differential value of your new tractor in comparis on to the competitor product? 3) What is the Exchange Value of the new tractor? 4) What range would you suggest the tractor be priced at on introduction?

Solutions

Expert Solution

Answer:-

1) What is the price of the nearest comparable alternative product to your tractor?  

Answer:- Comparable Alternative product to your tractor means Existing competitor's product (minus)/ Plus ( adjustements due to features differences)

so nearest comparable alternative product to your tractor = $14,000 - $1000 + $3500

= $16,500

note = 1. $1000 to be deducted because it is slower than existing tractor and '

2. $ 3500 added because this will enhances tractor and performance and adds up value.

2) What is the differential value of your new tractor in comparis on to the competitor product?

Answer:- Differential Value of your new Tractor = Competitors price - your Marginal Cost of Production.

= 14,000 - 8,500 = $5,500 is the differetial value .

3) What is the Exchange Value of the new tractor?

Answer:- exchange value of new tractor would be $3,500 - $1,000 = $2,500 because these are the benfits and losses which one can get on exchange their old tractor with new tractor as produced by your company.

4) What range would you suggest the tractor be priced at on introduction?

Answer:- The price to be suggested from my point of view is between $8,500 to $16,500

if company is a profit center they should price the product at $16,500 on the basis of demand in the market

and if company is cost center they should price the product at $8,500 to recover their marginal costs

ekkarill92 answered 1 year ago
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