John Richards, CEO of Richards Construction builds custom high end garages for c

Question

John Richards, CEO of Richards Construction builds custom high end garages for car collectors in a booming community in California. Although sales have slowed because of a national recession, it now looks as if the recession is about to end. Mr. Richards wants to be ready with material, labor, and foremen to meet the demand for garages. Last year, John built and sold 40 of these garages. With a recent recession over, Mr. Richards thinks that his sales will increase to 50 units for the current year. The going market price for a garage (which John and his numerous competitors have charged) has been $75,000. In addition, Richards Contruction's marginal cost of building this model averages $52,000. (NOTE: This question is NOT about the recent housing market crash)

a. Based on these facts, recommend a course of action for John.

b. Suppose that the economic boom raises the cost of labor and raw materials, so that the additional cost of a garage rises to $65,000. What is John's most profitable course of action? Explain.

Explanation / Answer

a.From my perspective john has to sell the house at a price of $75000 because his marginal cost is $52000 which will lead to a contribution of $23000 and which is good for John.

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