Blauvelt Electronics Corporation has developed a new instrument-model GZ-29-that has been designed to outperform a competitor's best-selling instrument. Model GZ-29 has a useful life of 30,000 hours of service and its operating cost is $3.20 per hour.In contrast, the competitor's product has a useful life of 10,000 hours of service and has operating costs that average $5.60 per hour. The competitor's instrument sells for $149,000. Blauvelt has not yet established a selling price for model GZ-29.From a value-based pricing standpoint what is GZ-29's economic value to the customer over its 30,000 hour useful life?
A) $519,000
B) $370,000
C) $205,000
D) $245,000

Question

Quizplus · Accepted Answer

Economic value is calculated by subtracting the total cost of ownership of the competitor's product from the total cost of ownership of the new product.

For the competitor's product: 
Total cost of ownership = (10,000 hours x $5.60 per hour) + $149,000 
Total cost of ownership = $70,000 + $149,000 
Total cost of ownership = $219,000

For GZ-29: 
Total cost of ownership = (30,000 hours x $3.20 per hour) + [Selling price] 
Selling price = total cost of ownership - (30,000 hours x $3.20 per hour) 
Selling price = $96,000

Economic value = Total cost of ownership of competitor's product - Total cost of ownership of GZ-29 
Economic value = $219,000 - ($96,000) 
Economic value = $519,000

So the economic value of GZ-29 over its 30,000 hour useful life is $519,000.

Blauvelt Electronics Corporation Has Developed a New Instrument-Model GZ-29-That Has