Morice Industries Inc. has developed a new injection mold, model IA-05, that is designed to offer superior performance to a comparable injection mold sold by Morice's main competitor. The competing injection mold sells for $54,000 and needs to be replaced after 1,000 hours of use. It also requires $7,000 of preventive maintenance during its useful life. Model IA-05'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 $8,000 of preventive maintenance during its useful life.
-From a value-based pricing standpoint what range of possible prices should Morice consider when setting a price for model IA-05?
A) $54,000 ≤ Value-based price ≤ $114,000
B) $54,000 ≤ Value-based price ≤ $108,000
C) $60,000 ≤ Value-based price ≤ $114,000
D) $60,000 ≤ Value-based price ≤ $108,000

Question

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 $54,000.
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 IA-05 rather than the competing alternative would avoid the need to buy two of the competitor's injection molds for $54,000 rather than just one IA-05 to achieve 2,000 hours of usage. This is a savings of $54,000 (=$54,000 × 1 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase IA-05 rather than the competing alternative would realize preventive maintenance savings computed as follows:
 11ea7761_164f_9ad5_81a5_5bcf676b6f2f_TB2580_00 Total differentiation value = $54,000 + $6,000 = $60,000
EVC = Reference value + Differentiation value = $54,000 + $60,000 = $114,000
Reference value ≤ Value-based price ≤ EVC
$54,000 ≤ Value-based price ≤ $114,000