Chruch Corporation manufactures numerous products, one of which is called Tau42. The company has provided the following data about this product:

-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

Chruch Corporation manufactures numerous products, one of which is called Tau42. The company has provided the following data about this product:
 
-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

Quizplus · Accepted Answer

The range of possible prices is as follows:
Reference value ≤ Value-based price ≤ EVC
The reference value is the price of the competing alternative, which is $31,000.
The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value
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:
 11ea7761_164b_ca3b_81a5_07b812d08639_TB2580_00 Total differentiation value = $31,000 + $5,000 = $36,000
EVC = Reference value + Differentiation value = $31,000 + $36,000 = $67,000
Reference value ≤ Value-based price ≤ EVC
$31,000 ≤ Value-based price ≤ $67,000

Chruch Corporation Manufactures Numerous Products, One of Which Is Called