Smith 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 $209,000 each. Assume the company has no fixed costs. 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.) Read the requirements, 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 stiff 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 $ 209,000 Less: Desired profit 26,320 Target full cost per home $ 182,680 Given the current market price and Smith's current variable costs, the company will not be able to achieve its desired profit. The company's profit will fall short of the target by 5,320 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 $12,000 per home but would enable Smith Builders to increase the sales prices by $21,000 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 Plus: Variable cost of kitchen and bathroom upgrade per home Total variable cost per home Plus: Desired profit per home Cost-plus price per home Enter any number in the edit fields and then click Check Answer. i Data Table $ 53,000 Land Construction Landscaping Variable selling costs 121,000 8,000 6,000 Print Done - X . Requirements 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 $12,000 per home but would enable Smith Builders to increase the sales prices by $21,000 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