Exercise 13A-3 (Algo) Value-Based Pricing [LO13-10] McDermott Company has developed a new industrial component called IC-75. The company is excited about IC-75 because it offers superior performance relative to the comparable component sold by McDermott's primary competitor. The competing part sells for $1,340 and needs to be replaced after 2,140 hours of use. It also requires $270 of preventive maintenance during its useful life. The IC-75's performance capabilities are similar to its competing product with two important exceptions-it needs to be replaced after 4,280 hours of use and it requires $370 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint: 1. What is the reference value that McDermott should consider when pricing IC-75? 2. What is the differentiation value offered by IC-75 relative the competitor's offering for each 4,280 hours of usage? 3. What is IC-75's economic value to the customer over its 4,280-hour life? 4. What range of possible prices should McDermott consider when setting a price for IC-75
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