Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Chicago. 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. Bennett Builders' cost per developed sublot are as follows: Land. . . . . . . . . . . . . . . . . . . . .$54,000 Construction. . . . . . . . . . . . . . .$126,000 Landscaping. . . . . . . . . . . . . . . $6,000 Variable marketing costs. . . . . .$2,000 Bennett Builders would like to earn a profit of 14% of the variable cost of each home sale. Similar homes offered by competing builders sell for $206,000 each. 1. Which approach to pricing should Bennett Builders emphasize? Why? 2. Will Bennett Builders be able to achieve its target profit levels? Show your computations. 3. Bathrooms and kitchens are typically the most important selling features of a home. Bennett Builders could differentiate the homes by upgrading bathrooms and kitchens. 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 upgrades typically add at least 150% of their cost to the value of any home.) If Bennett Builders upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Show your analysis

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Chicago. 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. Bennett Builders' cost per developed sublot are as follows:

Land. . . . . . . . . . . . . . . . . . . . .$54,000

Construction. . . . . . . . . . . . . . .$126,000

Landscaping. . . . . . . . . . . . . . . $6,000

Variable marketing costs. . . . . .$2,000

Bennett Builders would like to earn a profit of 14% of the variable cost of each home sale. Similar homes offered by competing builders sell for $206,000 each.

1.	Which approach to pricing should Bennett Builders emphasize? Why?
2.	Will Bennett Builders be able to achieve its target profit levels? Show your computations.
3.	Bathrooms and kitchens are typically the most important selling features of a home. Bennett Builders could differentiate the homes by upgrading bathrooms and kitchens. 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 upgrades typically add at least 150% of their cost to the value of any home.) If Bennett Builders upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Show your analysis.