FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Making pricing decisions
Johnson Builders builds 1,500—square-foot starter tract homes in the fast-growing suburbs of Atlanta. Land and labor are cheap, and competition among developers is fierce. The homes are a standard model, with any upgrades added by the buyer after the sale. Johnson Builders’s costs per developed sub lot are as follows:
Johnson Builders would like to earn a profit of 14% of the variable cost of each home sold. Similar homes offered by competing builders sell for $207,000 each. Assume the company has no fixed costs.
Requirements
- Which approach to pricing should Johnson Builders emphasize? Why?
- Will Johnson Builders be able to achieve its target profit levels?
- Bathrooms and kitchens are typically the most important selling features of a home. Johnson Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $16,000 per home but would enable Johnson Builders to increase the sales prices by $28,000 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Johnson Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?
Transcribed Image Text:Land
$ 50,000
Construction
123,000
Landscaping
9,000
Variable selling costs
8,000
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