Rouse 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. Rouse Builders’ costs per developed sub lot are as follows:
Land........................................$ 51,000
Construction............................ 121,000
Landscaping............................ 5,000
Variable selling costs.............. 4,000
Rouse Builders would like to earn a profit of 16% of the variable cost of each home sold. Similar homes offered by competing builders sell for $202,000 each. Assume the company has no fixed costs.
Requirements
1. Which approach to pricing should Rouse Builders emphasize? Why?
2. Will Rouse Builders be able to achieve its target profit levels?
3. Bathrooms and kitchens are typically the most important selling features of a home. Rouse Builders could differentiate the homes by upgrading the bathrooms and kitchens. The upgrades would cost $22,000 per home but would enable Rouse Builders to increase the selling prices by $38,500 per home. (Kitchen and bathroom upgrades typically add about 175% of their cost to the value of any home.) If Rouse Builders makes the upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner?