E25-12 Making pricing decisions Johnson Builders builds 1,500-square-foot starte
ID: 2547304 • Letter: E
Question
E25-12 Making pricing decisions Johnson 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. Johnson Builders's costs per developed sublot are as follows Land Construction Landscaping Variable selling costs s50,000 123,000 9,000 8,000 on Builders would like to earn a profit of 14% of the variable cost of each Johns home sold. Similar homes offered by competing builders sell for $207 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 bathrooms 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. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Johnson Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?Explanation / Answer
1 Johnson builders should emphasize on target costing since they are facing competition. 2 Market price 207000 Less:Desired profit (Note:1) 26600 Target cost 180400 Less:Current variable cost 190000 Expected Loss -9600 Johnson will not be able to achieve its target profit levels Notes: 1. Variable costs: Land 50000 Construction 123000 Landscaping 9000 Variable selling cost 8000 Total 190000 Profit margin in % 14% Total profit margin 26600 3 Current variable cost 190000 Add:Variable cost of Kitchen and bath upgrades 16000 Total variable costs 206000 Add:Desired profit @14% 28840 Cost-plus price 234840 Expected sales price=207000+28000=235000 Cost-Plus price is actually lower than the expected sales price.Hence,Company should differentiate product in this manner
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