Making pricing decisionsJohnson 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.RequirementsWhich 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 $28,000 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Johnson Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Land$ 50,000Construction123,000Landscaping9,000Variable selling costs8,000

Answered: Land $ 50,000 Construction 123,000…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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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?

Land
$ 50,000
Construction
123,000
Landscaping
9,000
Variable selling costs
8,000

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