Wermers Industries Incorporated 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 range of possible prices should Wermers consider when setting a price for model LS-88?
A) $36,000 ≤ Value-based price ≤ $62,000
B) $31,000 ≤ Value-based price ≤ $62,000
C) $31,000 ≤ Value-based price ≤ $67,000
D) $36,000 ≤ Value-based price ≤ $67,000

Question

Quizplus · Accepted Answer

To determine the value-based price range for the new drill press, we need to calculate the customer value of the LS-88 compared to the competitor's product.

Customer value = (Reference value - Total cost of ownership of competitor's product) + LS-88's additional benefits

Reference value = Price of the competitor's product = $31,000

Total cost of ownership of competitor's product = Price + Maintenance cost per hour * Useful life in hours = $31,000 + ($6,000 / 1,000 * 2,000) = $43,000

LS-88's additional benefits = (Useful life in hours - Competitor's useful life in hours) * Value of one hour of use + Additional maintenance cost - Competitor's maintenance cost

= (2,000 - 1,000) * $10 + ($7,000 - $6,000) = $10,000

Customer value = ($31,000 - $43,000) + $10,000 = $-2,000

Since the customer value is negative, Wermers should consider pricing the LS-88 below the competitor's product price to attract customers.

Therefore, the value-based price range for the LS-88 is $31,000 to $67,000, and the best choice is C.

Wermers Industries Incorporated Has Developed a New Drill Press, Model