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 Blauvelt consider when setting a price for GZ-29?
A) $245,000 ≤ Value-based price ≤ $370,000
B) $370,000 ≤ Value-based price ≤ $519,000
C) $149,000 ≤ Value-based price ≤ $519,000
D) $149,000 ≤ Value-based price ≤ $245,000

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 Blauvelt consider when setting a price for GZ-29?
A) $245,000 ≤ Value-based price ≤ $370,000 
B) $370,000 ≤ Value-based price ≤ $519,000 
C) $149,000 ≤ Value-based price ≤ $519,000 
D) $149,000 ≤ Value-based price ≤ $245,000

Quizplus · Accepted Answer

The range of possible prices is determined as follows:
Reference value ≤ Value-based price ≤ EVC
EVC = Reference value + Differentiation value
The reference value is the price of the competing alternative, which in this case is $149,000.
The differentiation value has two components. First, customers who purchase a GZ-29 rather than the competing alternative would avoid the need to buy three instruments for $149,000 rather than just one GZ-29 to achieve 30,000 hours of service. This is a savings of $298,000 (= 2 × $149,000) for the additional instruments that would have to be purchased. Second, customers who purchase a GZ-29 rather than the competing alternative would realize operating cost savings computed as follows:
 11ea7761_164b_2df9_81a5_114cadebf92a_TB2580_00 Differentiation value = $298,000 + $72,000 = $370,000
EVC = Reference value + Differentiation value = $149,000 + $370,000 = $519,000
Reference value ≤ Value-based price ≤ EVC
$149,000 ≤ Value-based price ≤ $519,000

Chruch Corporation Manufactures Numerous Products, One of Which Is Called