Smith Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Chicago. 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. Smith Builders' costs per developed sublet are as follows:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,000
Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $124,000
Landscaping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
Variable marketing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . $ 4,000
Smith Builders would like to earn a profit of 14% of the variable cost of each home sale. Similar homes offered by competing builders sell for $206,000 each.
Requirements
1. Which approach to pricing should Smith Builders emphasize? Why?
2. Will Smith 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. Smith Builders could differentiate the homes by upgrading bathrooms and kitchens. The upgrades would cost $18,000 per home but would enable Smith Builders to increase the selling prices by $31,500 per home (in general, kitchen and bathroom upgrades typically add at least 150% of their cost to the value of any home). If Smith Builders upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Show your analysis.