Valmont's cost accounting system reports an absorption unit product cost for XP-200 of $9,500. 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 20,000 hours before replacement. It only requires $2,100 of preventive maintenance during its useful life and it consumes $175 of electricity per 1,000 hours used. These figures compare favorably to the competing piece of equipment that sells for $20,000, needs to be replaced after 10,000 hours of use, requires $4,200 of preventive maintenance during its useful life, and consumes $206 of electricity per 1,000 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 20,000-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's cost accounting system reports an absorption unit product cost for XP-200 of $9,500. 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 20,000 hours before replacement. It only requires $2,100 of preventive maintenance during its useful life and it consumes $175 of electricity per 1,000 hours used. These figures compare favorably to the competing piece of equipment that sells for $20,000, needs to be replaced after 10,000 hours of use, requires $4,200 of preventive maintenance during its useful life, and consumes $206 of electricity per 1,000 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 20,000-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
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Transcribed Image Text:Valmont's cost accounting system reports an absorption unit product cost for XP-200 of $9,500. 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 20,000 hours before
replacement. It only requires $2,100 of preventive maintenance during its useful life and it consumes $175 of electricity per 1,000
hours used.
These figures compare favorably to the competing piece of equipment that sells for $20,000, needs to be replaced after 10,000
hours of use, requires $4,200 of preventive maintenance during its useful life, and consumes $206 of electricity per 1,000 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 20,000-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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