Smith 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. Smith Builders' costs per developed sublot are as follows: 1(Click the icon to view the costs.) Smith 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 $206,000 each. Assume the company has no fixed costs. Read the requirements2. Requirement 1. Which approach to pricing should Smith Builders emphasize? Why? Smith Builders will need to emphasize a target-costing approach to pricing because they are price-takers. This means Smith will not have much control over pricing because the tract homes are not unique and face stiff competition. Requirement 2. Will Smith Builders be able to achieve its target profit levels? Begin by calculating the target cost. Market price of similiar homes $206,000 Less: Desired profit Target full cost per home Given the current market price and Smith's current variable costs, the company will (1) to achieve its desired profit. The company's profit will (2) the target by per home sale. Requirement 3. Bathrooms and kitchens are typically the most important selling features of a home. Smith Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $22,000 per home but would enable Smith Builders to increase the sales prices by $38,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Smith Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Calculate the new cost-plus price per home. Current variable cost per home Plus: Variable cost of kitchen and bathroom upgrade per home Total variable cost per home Plus: Desired profit per home Cost-plus price per home Should the company differentiate its product in this manner? The new cost-plus price per home, with bath and kitchen upgrades, is actually (3) the expected market price of an upgraded house. If Smith can sell the upgraded homes for $244,500, as expected, he will earn (4) his desired profit. Smith (5) upgrade the bathrooms and kitchens so that he has (6) control over pricing. 1: Data Table Land $55,000 Construction 125,000 Landscaping 6,000 Variable selling costs 3,000 2: Requirements 1. Which approach to pricing should Smith Builders emphasize? Why? 2. Will Smith Builders be able to achieve its target profit levels? 3. Bathrooms and kitchens are typically the most important selling features of a home. Smith Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $22,000 per home but would enable Smith Builders to increase the sales prices by $38,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Smith Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?

Smith 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. Smith Builders' costs per developed sublot are as follows: 1(Click the icon to view the costs.) Smith 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 $206,000 each. Assume the company has no fixed costs. Read the requirements2. Requirement 1. Which approach to pricing should Smith Builders emphasize? Why? Smith Builders will need to emphasize a target-costing approach to pricing because they are price-takers. This means Smith will not have much control over pricing because the tract homes are not unique and face stiff competition. Requirement 2. Will Smith Builders be able to achieve its target profit levels? Begin by calculating the target cost. Market price of similiar homes $206,000 Less: Desired profit Target full cost per home Given the current market price and Smith's current variable costs, the company will (1) to achieve its desired profit. The company's profit will (2) the target by per home sale. Requirement 3. Bathrooms and kitchens are typically the most important selling features of a home. Smith Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $22,000 per home but would enable Smith Builders to increase the sales prices by $38,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Smith Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Calculate the new cost-plus price per home. Current variable cost per home Plus: Variable cost of kitchen and bathroom upgrade per home Total variable cost per home Plus: Desired profit per home Cost-plus price per home Should the company differentiate its product in this manner? The new cost-plus price per home, with bath and kitchen upgrades, is actually (3) the expected market price of an upgraded house. If Smith can sell the upgraded homes for $244,500, as expected, he will earn (4) his desired profit. Smith (5) upgrade the bathrooms and kitchens so that he has (6) control over pricing. 1: Data Table Land $55,000 Construction 125,000 Landscaping 6,000 Variable selling costs 3,000 2: Requirements 1. Which approach to pricing should Smith Builders emphasize? Why? 2. Will Smith Builders be able to achieve its target profit levels? 3. Bathrooms and kitchens are typically the most important selling features of a home. Smith Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $22,000 per home but would enable Smith Builders to increase the sales prices by $38,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Smith Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter16: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 11E

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Question

Smith

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.

Smith

Builders' costs per developed sublot are as follows:

1(Click

the icon to view the costs.)

Smith

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

$206,000

each. Assume the company has no fixed costs.

Read the

requirements2.

Requirement 1. Which approach to pricing should

Smith

Builders emphasize? Why?

Smith

Builders will need to emphasize a

target-costing

approach to pricing because they are

price-takers.

This means

Smith

will

not have much

control over pricing because the tract homes are

not unique and face

stiff competition.

Requirement 2. Will

Smith

Builders be able to achieve its target profit levels?

Begin by calculating the target cost.

Market price of similiar homes	$206,000
Less: Desired profit
Target full cost per home

Given the current market price and Smith's current variable costs, the company will	(1)	to achieve its desired profit.
The company's profit will	(2)	the target by		per home sale.

Requirement 3. Bathrooms and kitchens are typically the most important selling features of a home.

Smith

Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost

$22,000

per home but would enable

Smith

Builders to increase the sales prices by

$38,500

per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If

Smith

Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?

Calculate the new cost-plus price per home.

Current variable cost per home
Plus: Variable cost of kitchen and bathroom upgrade per home
Total variable cost per home
Plus: Desired profit per home
Cost-plus price per home

Should the company differentiate its product in this manner?

The new cost-plus price per home, with bath and kitchen upgrades, is actually

(3)

the expected market price of an upgraded house. If

Smith

can sell the upgraded homes for

$244,500,

as expected, he will earn

(4)

his desired profit.

Smith

(5)

upgrade the bathrooms and kitchens so that he has

(6)

control over pricing.

1: Data Table

Land	$55,000
Construction	125,000
Landscaping	6,000
Variable selling costs	3,000

2: Requirements

1.	Which approach to pricing should Smith Builders emphasize? Why?
2.	Will Smith Builders be able to achieve its target profit levels?
3.	Bathrooms and kitchens are typically the most important selling features of a home. Smith Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $22,000 per home but would enable Smith Builders to increase the sales prices by $38,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Smith Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?

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