A chemical plant uses 200 O-rings to seal valves for carrying corrosive material
ID: 447835 • Letter: A
Question
A chemical plant uses 200 O-rings to seal valves for carrying corrosive materials. Those O-rings cost $5.00 each and must be changed during regular maintenance every two months. Suppose the equipment must be shut down each time the O-rings are changed, and the cost of a shutdown is $5,000. A new product has twice the corrosive resisting power of the current O-rings. What is the maximum the seller of the new O-rings could charge the customers so that the customers see value in switching to the new O-rings from the one they currently use? [This problem highlights two concepts: Customer Value-in-Use Pricing and Total Cost]
Explanation / Answer
Cost Of 200 rings= 200*5=1000
Cost of shutdown=5000
hence total Annual Cost=Cost of 200 rings * changes/yr + Shutdown cost * changes /yr
=1000*6 +5000*6=36000
With the implementation of new o-rings there will be 3 changes in a year
Total Cost= 200*P*3 +5000*3
=600P+15000
hence 600P +15000 <=36000
hence P<=21000/600
P<=35
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