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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-200absorption cost-plus pricing and value-based pricing.

Valmonts cost accounting system reports an absorption unit product cost for XP-200 of $9,600. Its markup percentage on absorption cost is 85%. The companys 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 Valmonts primary competitor. More specifically, the XP-200 can be used for 21,000 hours before replacement. It only requires $2,200 of preventive maintenance during its useful life and it consumes $180 of electricity per 1,050 hours used.

These figures compare favorably to the competing piece of equipment that sells for $21,000, needs to be replaced after 10,500 hours of use, requires $4,400 of preventive maintenance during its useful life, and consumes $212 of electricity per 1,050 hours used.

Required:

1. If Valmont uses absorption cost-plus pricing, what price will it establish for the XP-200?

2. What is XP-200s economic value to the customer (EVC) over its 21,000-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?

• Req 1 and 2

If Valmont uses absorption cost-plus pricing, what price will it establish for the XP-200?

What is XP-200s economic value to the customer (EVC) over its 21,000-hour life?

	1. Selling price per unit 2. EVC

• Req 3

If Valmont uses value-based pricing, what range of possible prices should it consider when setting a price for the XP-200?

	Range of possible prices Value-based price

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