Hilfiger Industries Incorporated has developed a new forklift, model UH-40, that is designed to offer superior performance to a comparable forklift sold by Hilfiger's main competitor. The competing forklift sells for $96,000 and needs to be replaced after 1,000 hours of use. It also requires $9,000 of preventive maintenance during its useful life. Model UH-40'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 $13,000 of preventive maintenance during its useful life.From a value-based pricing standpoint what is model UH-40's economic value to the customer over its 2,000 hour life?
A) $114,000
B) $197,000
C) $101,000
D) $192,000

Question

Quizplus · Accepted Answer

To find the economic value of the model UH-40, we need to calculate the cost savings that it provides compared to the competitor's forklift. 
The competitor's forklift costs $96,000 and lasts for 1,000 hours of use, which means the cost per hour of use is $96. 
In comparison, the UH-40 lasts for 2,000 hours of use and requires $13,000 of preventive maintenance during its useful life. This means the cost per hour of use is ($13,000 + cost of UH-40)/2,000. 
To find the economic value, we need to subtract the cost per hour of use for the UH-40 from the cost per hour of use for the competitor's forklift, and then multiply the difference by the number of hours of use for the UH-40. 
So the economic value of the UH-40 = (96 - (13,000 + cost of UH-40)/2,000) * 2,000 = 197,000 - cost of UH-40. 
Solving for the cost of UH-40, we get $83,000. Therefore, the economic value of the UH-40 is $197,000 - $83,000 = $114,000.

Hilfiger Industries Incorporated Has Developed a New Forklift, Model UH-40