Valmont Company has developed a new industrial piece of equipment called the XP-200. The company is considering two methods of establishing a selling price for the XP-200-absorption cost-plus pricing and value-based pricing. Valmont's cost accounting system reports an absorption unit product cost for XP-200 of $9,300. Its markup percentage on absorption cost is 85%. The company's marketing managers have expressed concerns about the use of absorption cost-plus pricing because it seems to overlook the fact that the XP-200 offers superior performance relative to the comparable piece of equipment sold by Valmont's primary competitor. More specifically, the XP-200 can be used for 18,000 hours before replacement. It only requires $1,900 of preventive maintenance during its useful life and it consumes $165 of electricity per 900 hours used. These figures compare favorably to the competing piece of equipment that sells for $18,000, needs to be replaced after 9,000 hours of use, requires $3,800 of preventive maintenance during its useful life, and consumes $194 of electricity per 900 hours used. Required: 1. If Valmont uses absorption cost-plus pricing, what price will it establish for the XP-200? 2. What is XP-200's economic value to the customer (EVC) over its 18,000-hour life? 3. If Valmont uses value-based pricing, what range of possible prices should it consider when setting a price for the XP-200?
Valmont Company has developed a new industrial piece of equipment called the XP-200. The company is considering two methods of establishing a selling price for the XP-200-absorption cost-plus pricing and value-based pricing. Valmont's cost accounting system reports an absorption unit product cost for XP-200 of $9,300. Its markup percentage on absorption cost is 85%. The company's marketing managers have expressed concerns about the use of absorption cost-plus pricing because it seems to overlook the fact that the XP-200 offers superior performance relative to the comparable piece of equipment sold by Valmont's primary competitor. More specifically, the XP-200 can be used for 18,000 hours before replacement. It only requires $1,900 of preventive maintenance during its useful life and it consumes $165 of electricity per 900 hours used. These figures compare favorably to the competing piece of equipment that sells for $18,000, needs to be replaced after 9,000 hours of use, requires $3,800 of preventive maintenance during its useful life, and consumes $194 of electricity per 900 hours used. Required: 1. If Valmont uses absorption cost-plus pricing, what price will it establish for the XP-200? 2. What is XP-200's economic value to the customer (EVC) over its 18,000-hour life? 3. If Valmont uses value-based pricing, what range of possible prices should it consider when setting a price for the XP-200?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Valmont Company has developed a new industrial piece of equipment called the XP-200. The company is considering two methods of
establishing a selling price for the XP-200-absorption cost-plus pricing and value-based pricing.
Valmont's cost accounting system reports an absorption unit product cost for XP-200 of $9,300. Its markup percentage on absorption
cost is 85%. The company's marketing managers have expressed concerns about the use of absorption cost-plus pricing because it
seems to overlook the fact that the XP-200 offers superior performance relative to the comparable piece of equipment sold by
Valmont's primary competitor. More specifically, the XP-200 can be used for 18,000 hours before replacement. It only requires $1,900
of preventive maintenance during its useful life and it consumes $165 of electricity per 900 hours used.
These figures compare favorably to the competing piece of equipment that sells for $18,000, needs to be replaced after 9,000 hours
of use, requires $3,800 of preventive maintenance during its useful life, and consumes $194 of electricity per 900 hours used.
Required:
1. If Valmont uses absorption cost-plus pricing, what price will it establish for the XP-200?
2. What is XP-200's economic value to the customer (EVC) over its 18,000-hour life?
3. If Valmont uses value-based pricing, what range of possible prices should it consider when setting a price for the XP-200?
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