Bochenski Mechanical Corporation has developed a new industrial grinder-model UF-48-that has been designed to outperform a competitor's best-selling industrial grinder. Model UF-48 has a useful life of 80,000 hours of service and its operating cost is $1.95 per hour. In contrast, the competitor's product has a useful life of 20,000 hours of service and has operating costs that average $2.75 per hour. The competitor's industrial grinder sells for $148,000. Bochenski has not yet established a selling price for model UF-48.
Required:
From a value-based pricing standpoint what is the differentiation value offered by model UF-48 relative to the competitor's offering for each 80,000 hours of service?

Question

Emily Carrico · Accepted Answer

Final Answer :

The differentiation value has two components. First, customers who purchase a model UF-48 rather than the competing alternative would avoid the need to buy four industrial grinders for ${{[a(3)]:#,###}} rather than just one UF-48 to achieve {{[a(1)]:#,###}} hours of service. This is a savings of ${{[a(8)]:#,###}} (= {{[a(7)]:#,###}} × ${{[a(3)]:#,###}}) for the additional industrial grinders that would have to be purchased. Second, customers who purchase a model UF-48 rather than the competing alternative would realize operating cost savings computed as follows:

Differentiation value = ${{[a(8)]:#,###}} + ${{[a(11)]:#,###}} = ${{[a(12)]:#,###}}

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