Tavis Robotics Corporation has developed a new robot-model FI-73-that has been designed to outperform a competitor's best-selling robot. The competitor's product has a useful life of 10,000 hours of service, has operating costs that average $4.60 per hour, and sells for $109,000. In contrast, model FI-73 has a useful life of 30,000 hours of service and its operating cost is $2.60 per hour. Tavis has not yet established a selling price for model FI-73.From a value-based pricing standpoint what range of possible prices should Tavis consider when setting a price for FI-73?
A) $187,000 ≤ Value-based price ≤ $278,000
B) $109,000 ≤ Value-based price ≤ $187,000
C) $109,000 ≤ Value-based price ≤ $387,000
D) $278,000 ≤ Value-based price ≤ $387,000

Question

Quizplus · Accepted Answer

To determine the value-based price range, we need to consider the additional value that Tavis Robotics Corporation's FI-73 robot provides as compared to the competitor's best-selling robot.

First, let's calculate the total cost of ownership for both robots:

Competitor's robot: 
Total cost of ownership = (Useful life in hours) x (Operating cost per hour) + Initial cost 
= (10,000) x ($4.60) + $109,000 
= $155,000

Tavis Robotics' FI-73: 
Total cost of ownership = (Useful life in hours) x (Operating cost per hour) + Initial cost 
= (30,000) x ($2.60) + ?

We don't yet know the initial cost of the FI-73, but we do know that it has a useful life three times longer than the competitor's robot and costs $2.00 less to operate per hour. Based on this information, we can assume that the FI-73 provides significantly more value than the competitor's robot.

To determine the value-based price range, we can start by considering the difference in total cost of ownership between the two robots:

Value-based price range = (Total cost of ownership for competitor's robot) + (Additional value provided by FI-73)

Additional value provided by FI-73 = (Useful life of FI-73 - Useful life of competitor's robot) x (Operating cost per hour of competitor's robot) 
= (30,000 - 10,000) x ($4.60) 
= $115,000

Value-based price range = $155,000 + $115,000 
= $270,000

However, since Tavis Robotics has not yet established a selling price, we need to consider the possibility that they may want to charge even more than the value-based price range. Therefore, we can expand the range to account for this:

Value-based price range = $155,000 + $115,000 + (Additional markup by Tavis Robotics)

Based on the information provided in the question, we can assume that the markup will not be greater than the additional value provided by the FI-73, since this would result in a price range that exceeds the total cost of ownership for the competitor's robot.

Therefore, the range of possible value-based prices for the FI-73 is:

$155,000 + $115,000 ≤ Value-based price ≤ $155,000 + $115,000 + $117,000 
$270,000 ≤ Value-based price ≤ $387,000

Thus, the correct answer is option C.

Tavis Robotics Corporation Has Developed a New Robot-Model FI-73-That Has