Blauvelt Electronics Corporation has developed a new instrument-model GZ-29-that has been designed to outperform a competitor's best-selling instrument. Model GZ-29 has a useful life of 30,000 hours of service and its operating cost is $3.20 per hour.In contrast, the competitor's product has a useful life of 10,000 hours of service and has operating costs that average $5.60 per hour. The competitor's instrument sells for $149,000. Blauvelt has not yet established a selling price for model GZ-29.From a value-based pricing standpoint what is GZ-29's economic value to the customer over its 30,000 hour useful life?

A) $519,000
B) $370,000
C) $205,000
D) $245,000

Question

Natalie Basham · Accepted Answer

Final Answer : A, Explanation :  Economic value is calculated by subtracting the total cost of ownership of the competitor's product from the total cost of ownership of the new product.For the competitor's product:Total cost of ownership = (10,000 hours x $5.60 per hour) + $149,000Total cost of ownership = $70,000 + $149,000Total cost of ownership = $219,000For GZ-29:Total cost of ownership = (30,000 hours x $3.20 per hour) + [Selling price]Selling price = total cost of ownership - (30,000 hours x $3.20 per hour)Selling price = $96,000Economic value = Total cost of ownership of competitor's product - Total cost of ownership of GZ-29Economic value = $219,000 - ($96,000)Economic value = $519,000So the economic value of GZ-29 over its 30,000 hour useful life is $519,000.

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