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 $1.00 per hour. In contrast, the competitor's product has a useful life of 20,000 hours of service and has operating costs that average $1.80 per hour. The competitor's industrial grinder sells for $129,000. 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?
What will be an ideal response?
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 $129,000 rather than just one UF-48 to achieve 80,000 hours of service. This is a savings of $387,000 (= 3 × $129,000) 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:
| Operating costs for 80,000 hours of service: | ||
| Competitor's product (80,000 hours × $1.80 per hour) | $ | 144,000 |
| Model UF-48 ((80,000 hours × $1.00 per hour) | 80,000 | |
| Operating cost savings | $ | 64,000 |
? | ||
| Differentiation value = $387,000 + $64,000 = $451,000 | ||
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