Ludy Mechanical Corporation has developed a new industrial grinder-model YS-48-that has been designed to outperform a competitor's best-selling industrial grinder. Model YS-48 has a useful life of 100,000 hours of service and its operating cost is $0.90 per hour. In contrast, the competitor's product has a useful life of 20,000 hours of service and has operating costs that average $1.50 per hour. The competitor's industrial grinder sells for $169,000. Ludy has not yet established a selling price for model YS-48.From a value-based pricing standpoint what is the differentiation value offered by YS-48 relative to the competitor's offering for each 100,000 hours of service?
A) $736,000
B) $60,000
C) $199,000
D) $259,000

Question

Quizplus · Accepted Answer

The differentiation value is calculated by comparing the total cost of ownership for both products over 100,000 hours. The competitor's grinder would need to be replaced 5 times (100,000/20,000) at a cost of $169,000 each, totaling $845,000. The operating cost for the competitor's grinder is $1.50 per hour, totaling $150,000 for 100,000 hours. The total cost for the competitor's grinder is $995,000. For YS-48, the operating cost is $0.90 per hour, totaling $90,000 for 100,000 hours. The differentiation value is $995,000 - $90,000 = $905,000. However, since the question asks for the differentiation value relative to the competitor's offering, we subtract the cost of the competitor's grinder ($169,000) from $905,000, resulting in $736,000.

Ludy Mechanical Corporation Has Developed a New Industrial Grinder-Model YS-48-That