20A Pricing decisions given two scenarios (Learning Objective 3) Preston Builder

Question

20A Pricing decisions given two scenarios (Learning Objective 3) Preston Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Houston. Land and labor are cheap, and competition among developers is fierce. The homes are "cookie-cutter," with any upgrades added by the buyer after the sale. Preston Builders' costs per developed sublot are as follows: Land Construction.. Landscaping Variable marketing costs. $121,000 9,000 5,000 Preston Builders would like to earn a profit of 15% of the variable cost of each home sale. Similar homes offered by competing builders sell for $204,000 each. Requirements 1. Which approach to pricing should Preston Builders emphasize? Why? 2. Will Preston Builders be able to achieve its target profit levels? Show your computations. Bath rooms and kitchens are typically the most important selling features of a home. reston Builders could differentiate the homes by upgrading bathrooms and kitch- ns The upgrades would cost $20,000 per home but would enable the company to increase the selling prices by $35,000 per home (in general, kitchen and bathroom 3. upgrades typical!yadd at least 150% of their cost to the value of any home). If Pr theston Builders upgrades, what will the new cost-plus price per home be? Should company differentiate its product in this manner? Show your analysis.

Explanation / Answer

Answer 1. Peterson Builders should use Target Pricing approach to pricing. Because the Tract Home is not unique and Peterson faces stiff competition. Answer 2. Selling Price per Home          204,000 Target Profit - $186,000 X 15%            27,900 Target Cost per Home          176,100 Cost per Home - $51,000 + $121,000 + $9,000 + $5,000          186,000 Expected Excess (Less) Profit            (9,900) Answer 3. Current Total Cost per Home          186,000 Add: Upgraded Cost - Kitchen & Bathroom            20,000 Total Cost per Home          206,000 Desired Profit - $206,000 X 15%            30,900 Target Selling price per Home          236,900 Expected Market Price per Home          239,000 Target Selling price per Home          236,900 Excess Profit Earned per Home              2,100 Peterson should sell the upgraded home as it will earn more than its expected profits and also some control over pricing of the Home.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.