Data Table -X Land $ 51,000 Construction 121,000 5,000 Landscaping Variable selling costs 2,000 Print Done Requirements - X 1. Which approach to pricing should Smith Builders emphasize? Why? 2. Will Smith Builders be able to achieve its target profit levels? 3. Bathrooms and kitchens are typically the most important selling features of a home. Smith Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $30,000 per home but would enable Smith Builders to increase the sales prices by $52,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Smith Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Print Done Question Help Smith 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. Smith Builders's costs per developed sublot are as follows: (Click the icon to view the costs.) Smith Builders would like to earn a profit of 16% of the variable cost of each home sold. Similar homes offered by competing builders sell for $201.000 each. Assume the company has no fixed costs. Read the fucuirements Requirement 1. Which approach to pricing should Smith Builders emphasize? Why? Smith Builders will need to emphasize a target-costing approach to pricing because they are price-takers. This means Smith will not have much control over pricing because the tract homes are not unique and face competition Requirement 2. Will Smith Builders be able to achieve its target profit levels? Begin by calculating the target cost. Market price of similiar homes 201,000 Less: Desired profit 28.640 Target full cost per home 172.360 Given the current market price and Smith's current variable costs, the to achieve its desired company will not be able profit The company's profit will fall short of the target by s 6,640 per home sale Requirement 3. Bathrooms and kitchens are typically the most important selling features of a home, Smith Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $30,000 per home but would enable Smith Builders to increase the sales prices by $52,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Smith Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Calculate the new cost-plus price per home. Current variable cost per home 179,000 Plus: Variable cost of kitchen and bathroom upgrade per home Total variable cost per home Plus: Desired profit por homo Cost-plus price por home Should the company differentiate its product in this manner? The new cost-plus price por home, with bath and kitchen upgrades, is actually lower than the expected market price of an upgraded house. If Smith can sell the upgraded homes for $253,500, as expected, he will earn more than his desired profit. Smith should upgrade the bathrooms and kitchens so that he has more control over pricing
