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 "cookie-cutter," with any upgrades added by the buyer after the sale. Johnson Builders' costs per developed sublot are as follows:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,000
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,000
Landscaping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,000
Variable marketing costs .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000
Johnson Builders would like to earn a profit of 16% of the variable cost of each home sale. Similar homes offered by competing builders sell for $201,000 each.
Requirements
1. Which approach to pricing should Johnson Builders emphasize? Why?
2. Will Johnson Builders be able to achieve its target profit levels? Show your computations.
3. Bathrooms and kitchens are typically the most important selling features of a home. Johnson Builders could differentiate the homes by upgrading bathrooms and kitchens. The upgrades would cost $24,000 per home but would enable Johnson Builders to increase the selling prices by $42,000 per home (in general, kitchen and bathroom upgrades typically add at least 150% of their cost to the value of any home.) If Johnson Builders upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Show your analysis.