Facts & Summary:
Cumberland Metal Industries (CMI), a company making curled metal products, has developed a new product, metal cushion pad. The product has been tested to be much more durable and safer than the existing alternatives and helps in driving piles faster. The alternatives, lower quality wooden blocks, asbestos pads or micarta slabs, are not very efficient. However, they are very low priced. The main challenge CMI is facing is to price its new pads.
The most popular size for the cushion pads was 11 ½ inches. Moreover, the information available on the popularity of other sizes was vague. Therefore, CMI should initially start with the production of 11 ½ inches cushion pads. Typical price of an 11 ½ inches asbestos pad is $3.
As per conservative estimate CMIs pad lasts 10 times longer than the asbestos pads. Based on product life, the pad will only have $30 value. Another way can be based on materials used. In Colerick Test $ 1000 was spent on asbestos pads while the same job could be done by using just 6 CMI pad. So the perceived value of CMI pad can be 1000/6 = $ 166.7. Similarly, in Fazio test, the perceived value can be 2000/5 = $ 400 (50 asbestos sets @ $ 40 per set were used when the same job was done by using 5 CMI pads).However, we need to consider the increase in efficiency and the resulting decrease in time taken by employing CMI pads.
for Colerick 20 sets @ $ 50 per set and for Fazio 50 sets @ $ 40 per set
Considering the estimated total costs of $ 238 per hour for a job similar to that performed by Colerick
total time saved x estimated cost per hour
total cost of set + total cost saved
total economic value of CMI set / no of CMI pads per set
So as per these two tests the economic value of each CMI pad should range from $ 1,423