25-12 Making pricing decisions Learning Objective 2 on Builders builds 1,500-squ

Question

25-12 Making pricing decisions Learning Objective 2 on Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Atlanta. L and 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. Johnson Builders's costs per developed sublot are as follows: 3. Desired profit $28,840 Land Construction Landscaping Variable selling costs 50,000 123,000 9,000 8,000 Johnson 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 $207,000 each. Assume the company has no fixed costs. Requirements 1. Which approach to pricing should Johnson Builders emphasize? Why? 2. Will Johnson Builders be able to achieve its target profit levels? 3. Bathrooms and kitchens are typically the most important selling features of a home. Johnson Builders could differentiate the homes by upgrading the bath- rooms and kitchens. The upgrades would cost $16,000 per home but would enable Johnson Builders to increase the sales prices by $28,000 per home.

Explanation / Answer

(1) The Johnson Builders should emphasize on Competition based Pricing approach as the business is not a unique one and has fierce competition. Also, since it is a new beginner, it can offer some discount to the price of the competition to establish itself in the market. If Johnson builders goes for cost based pricing approach and keeps the selling price at (Variable Cost+14% Profit), its selling price will be $216,600 which would be much higher than its competitors and as a result it wont be able to compete in the market.

(2)No, the Maximum Selling Price Johnson Builders can offer would be $207,000 and its total variable cost is $190000.

So, Profit = $17,000 and margin= 8.95%

(3) If Johnson Builders differntiates the come by upgrading bathrooms and kitchens,

its total cost would be =190000+16000=206000

However, its selling price it can now offer= 207000+28000= 235000 as per competition based pricing approach.

However, since Johnson Builder has been able to differntiate its houses, it can go for cost plus profit pricing and so pricing would be (206000+14%= 234840)

and its desired profit of $28840 can be achieved.

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