BACKGROUND

The partners in Rockwood Housing Company (RHC), Peter Wong and Rachel Lim have recently decided to update the fixed-price home packages they offer because of the intense competition they now face. However, both believe this is a good strategy, as due to the growing economy and increased immigration, there is a shortage of housing in New Zealand. As Rachel explains: "Even though competition is increasing, the current housing crisis means there is enough pieces in the pie to go around. If we get the price of the new home packages right, we will make money." The fixed-priced home packages offered by RHC cover the costs of building the home (to one of several pre-designed plans), as well as the cost of floor coverings, a stylish kitchen with stainless steel appliances, fashionable light fittings, a quality heat pump, fencing, paving and other landscaping. In addition, they will build the new homes on land owned by their customers or will purchase suitable land and include that in the price.

THE NEW HOME PACKAGES

Rachel and Matt (the sales manager) spend several months researching market trends and finding out what customers want in their new homes. Rachel estimates this has cost $20,000. Based on this research, RHC have developed ten different home packages. One of these is the Waterstone Home Package. Rachel is an architect, and she has spent several weeks designing these ten new homes at a total cost of $15,000. This cost includes drawing the plans, designing the interior and landscaping options, and determining how much the various components would cost.

The cost of the land, if provided by RHC averages $250,000. They expect each home package design to have a life of 4 years. RHC also wants to make, on average, a profit margin (return on sales) of 5% per home package. Rachel and Peter decide that the research and design costs above are to be split evenly between the ten home package types. RHC also plans to spend $40,000 per year, marketing their ten new home packages. The marketing costs are also to be split evenly between the ten packages. Building overhead is to be allocated to each home package design based on labour costs. Currently, RHC use a predetermined overhead rate of 60% of labour cost.

THE WATERSTONE HOME PACKAGE

A Waterstone house has 3 bedrooms, 2 bathrooms, a double internal access garage, an office area (study) and an outdoor patio area. After much discussion Peter and Rachel come up with two pricing options for the Waterstone Home Package as follows: Selling Price per home built (excluding land cost) Average number of Waterstone packages to be sold, in total, over the 4-years Option 1 $355,000 16 Option 2 $365,000 12 An analysis of the building (production) costs for the Waterstone Home Package indicates that the following per package costs will be incurred: Building Materials $90,000 Furnishings & Fittings $35,000 Landscaping $15,000 Labour $100,000 As Peter is a registered Master Builder, RHC offers the standard Master Builder 10-year guarantee. Based on experience, they expect that customer service claims and repairs will cost them 3% of sales revenue and other customer service costs such as consultation on the design, the selection of furnishings, appliances and fittings, and landscaping ideas, are estimated to be 7% of sales revenue. Peter and Rachel look at the information they have collected but cannot agree on the price. Peter argues that they should charge $355,000 (option 1) as they will sell more houses. Rachel wants to charge $365,000 (option 2) because it seems to her, that option 2 possibly makes them more money. While they are discussing the two pricing options, Matt (sales manager) comes into the office and joins in the conversation. He mentionsthat last month's customer survey indicates potential customers would not be prepared to pay more than $350,000 for a house that has the equivalent specifications as the Waterstone Home Package. He also believes at that price, they could sell 14 Waterstone packages, in total, over the 4-years. Rachel looks at Peter and asks: "so what price do we charge - is it $350,000, $355,000 or $365,000?" Peter doesn't know what the answer is. They decide to employ your team as consultants and ask you to provide advice regarding the price they should charge and new techniques they could use for cost control and reduction purposes.

Required:

Would like help in understatnding and presenting a report for the owners of Rockwood Housing Company, Peter Wong and Rachel Lim, that:

(a) Explains what a value chain is and presents a process-level value chain diagram for RHC for building "home packages."

(b) Presents a lifecycle budget for the Waterstone Home Package for the two pricing options (1 and 2). There is no need to calculate cost category percentages or separate the budget into years. Ignore the time value of money.

(c) Calculates the lifecycle cost, lifecycle profit, and Return on Sales per Waterstone Home Package for the two pricing options (1 and 2) and comments on the result.

(d) Uses the price given by Matt to calculate the target cost and lifecycle cost per Waterstone Home Package and comments on the result. (e) Makes a recommendation, with reasons, as to what price Peter and Rachel should charge for the Waterstone Home Package.

(f) Provides advice to Peter and Rachel, using examples and the relevant information from parts (a) to (e) above, how value chain analysis can help them control and potentially reduce costs at RHC.