Asked by Boston Bragg on May 14, 2024
Verified
Morice Industries Incorporated 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 is the differentiation value offered by model IA-05 relative to the competitor's offering for each 2,000 hours of usage?
A) $68,000
B) $60,000
C) $6,000
D) $108,000
Value-Based Pricing
Pricing strategy where the selling price is determined by estimating the product's or service's value to the customer rather than its cost of production or market competition.
Preventive Maintenance
Routine maintenance and inspections carried out to prevent potential problems or failures before they occur.
Useful Life
The estimated period of time over which an asset is expected to be usable by the entity, after which it may no longer be economically beneficial to keep.
- Evaluate the differentiation value offered by a product relative to its competitors.
Verified Answer
For the competitor's injection mold:
Total cost = $54,000 + $7,000 = $61,000
For Model IA-05:
Total cost = Cost of Mold + Preventive Maintenance Cost
Total cost = $68,000 + $8,000 = $76,000
Differentiation Value = Total Cost of Model IA-05 - Total Cost of Competitor's Injection Mold
Differentiation Value = $76,000 - $61,000 = $15,000
However, the question asks for the differentiation value relative to each 2,000 hours of usage. Since the competitor's injection mold needs to be replaced after 1,000 hours of use, we need to divide the total cost by 2 to compare them on a per 2,000 hours basis.
For the competitor's injection mold:
Total cost per 2,000 hours = $61,000/2 = $30,500
For Model IA-05:
Total cost per 2,000 hours = $76,000/2 = $38,000
Differentiation Value per 2,000 hours = Total Cost per 2,000 hours of Model IA-05 - Total Cost per 2,000 hours of Competitor's Injection Mold
Differentiation Value per 2,000 hours = $38,000 - $30,500 = $7,500
Therefore, the differentiation value offered by model IA-05 relative to the competitor's offering per 2,000 hours of usage is $7,500. The answer is B.
Learning Objectives
- Evaluate the differentiation value offered by a product relative to its competitors.
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