Question

Schimpf Industries Inc. has developed a new grinder, model WC-13, that is designed to offer superior performance to a comparable grinder sold by Schimpf’s main competitor. The competing grinder sells for $86,000 and needs to be replaced after 13,200 hours of use. It also requires $26,400 of preventive maintenance during its useful life. Model WC-13’s performance capabilities are similar to the competing product with two important exceptions—it needs to be replaced only after 52,800 hours of use and it requires $66,000 of preventive maintenance during its useful life.

From a value-based pricing standpoint what range of possible prices should Schimpf consider when setting a price for model WC-13?

Answer 1

The total cost of competitor becomes (86000 + 26400) = 112400 for 13200 hours which brings the cost to around 8.515 per hour of grinder.

for new model wc -13 which has repairs cost of 66000 and has a life of 52800 . If we compare the same hours with competitior grinder it would cost us (52800 x 8.515)= 450000

so the maximum price that schimpf company should set for machine is (450000 - 66000)= 384000. Because the performance is same hence it cannot increase the price more than this otherwise it would lose the market.