Question

Wermers Industries Inc. has developed a new drill press, model LS-88, that is designed to offer superior performance to a comparable drill press sold by Wermers’s main competitor. The competing drill press sells for $31,000 and needs to be replaced after 1,000 hours of use. It also requires $6,000 of preventive maintenance during its useful life. ModelLS-88’s performance capabilities are similar to the competing product with two important exceptions—it needs to be replaced only after 2,000 hours of use and it requires $7,000 of preventive maintenance during its useful life.

From a value-based pricing standpoint what is model LS-88’s economic value to the customer over its 2,000 hour life?

Multiple Choice

$62,000

$36,000

$67,000

$43,000

Answer 1

Answer:$67,000

model LS-88’s economic value to the customer over its 2,000 hour life =$67,000

Working notes for the above answer is as under

The economic value to the customer (EVC) is computed as follows:

EVC = Reference value + Differentiation value

The reference value is the price of the competing alternative, which is $31,000.

The differentiation value has two elements. First, customers who purchase model LS-88 rather than the competing alternative would avoid the need to buy two of the competitor’s drill presss for $31,000 rather than just one LS-88 to achieve 2,000 hours of usage.

This is a savings of $31,000 (=$31,000 × 1 additional component(s)) for the additional component(s) that would have to be purchased.

Second, customers who purchase LS-88 rather than the competing alternative would realize preventive maintenance savings computed as follows

Preventive maintenance cost for 2,000 hours of service:
Competitor’s product ($6,000 × (2,000 hours ÷ 1,000 hours))	12000
LS-88 ($7,000 × (2,000 hours ÷ 2,000 hours	7000
Preventive maintenance cost savings(12000-7000)	5000

Total differentiation value

= $31,000 + $5,000

= $36,000

EVC

= Reference value + Differentiation value

= $31,000 +$36,000

=$67,000