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 $ 9,400. 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 19,000 hours before replacement. It only requires $2,000 of preventive maintenance during its useful life and it consumes $170 of electricity per 950 hours used. These figures compare favorably to the competing piece of equipment that sells for $19,000, needs to be replaced after 9, 500 hours of use, requires $4,000 of preventive maintenance during its useful life, and consumes $200 of electricity per 950 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 19,000 - 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? please show your work and any formulas that you used.
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 $ 9,400. 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 19,000 hours before replacement. It only requires $2,000 of preventive maintenance during its useful life and it consumes $170 of electricity per 950 hours used. These figures compare favorably to the competing piece of equipment that sells for $19,000, needs to be replaced after 9, 500 hours of use, requires $4,000 of preventive maintenance during its useful life, and consumes $200 of electricity per 950 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 19,000 - 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? please show your work and any formulas that you used.
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 $
9,400. 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 19,000 hours before replacement. It only
requires $2,000 of preventive maintenance during its
useful life and it consumes $170 of electricity per 950
hours used. These figures compare favorably to the
competing piece of equipment that sells for $19,000,
needs to be replaced after 9, 500 hours of use, requires
$4,000 of preventive maintenance during its useful life,
and consumes $200 of electricity per 950 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 19,000-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? please
show your work and any formulas that you used.
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