Question

Conaghan Avionics Corporation has developed a new high pressure pump-model RA 79-that has been designed to outperform a competitor's best selling high pressure pump. The competitor's product has a useful life of 30,000 hours of service, has operating costs that average $3.60 per hour and sells for $159.000. In contrast, model RA-19 has a useful life of 60,000 hours of service and its operating cost is $2.00 per hour. Conaghan has not yet established a selling price for model Rл 79. From a value-based pricing standpoint what is RA79's economic value to the customer over its 60,000 hour useful life? Multiple Choice o O SAA,ооо o О $267,000 o $256 000 o О $279,000

Answer 1

Answer:- $414,000

Explanation:-

The economic value to customer = Reference value + Differentiation value

The reference value = $159,000(price of competing alternative)

Operating cost for 60,000 hours of service:
Competitors product (60,000 hours × $3.6 per hour)	$216,000
Model RA-79 (60,000 hours × $2 per hour)	$120,000
Operating cost saving	$96,000($216,000 - $120,000)

Customer who purchase Model RA-79 would avoid to buy two pressure pump to achieve 60,000 hours of service. Thus saving of $159,000 (1 ×$159,000)

Differentiation value =$159,000 + $96,000 =$255,000

Economic value to customer = Reference value + Differentiation value

Economic value to customer = $159,000 + $255,000 =$414,000