FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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**E8-19A Pricing Decisions Given Two Scenarios**

**Overview:**
Dominic Builders constructs 1,500-square-foot starter tract homes in the rapidly expanding suburbs of Atlanta. Due to inexpensive land and labor and intense competition among developers, the homes are "cookie-cutter," with any upgrades added by the buyer after the sale.

**Cost Breakdown:**
- Land: $52,000
- Construction: $122,000
- Landscaping: $6,000
- Variable marketing costs: $3,000

**Profit Goal:**
Dominic Builders aims to achieve a profit of 14% of the variable cost of each home sale. Competing builders are selling similar homes for $202,000 each.

**Requirements:**
1. **Pricing Strategy:**
   - Discuss the optimal pricing strategy Dominic Builders should adopt, explaining the rationale behind the choice.

2. **Profit Target Feasibility:**
   - Analyze if Dominic Builders can meet its profit targets by demonstrating necessary calculations.

3. **Upgrading Strategy Analysis:**
   - Kitchens and bathrooms are key selling features. Consider a strategy where Dominic Builders upgrades these areas at a cost of $20,000 per home and raises the selling price by $35,000.
   - Since such upgrades typically enhance home value significantly (150% of their cost), evaluate the best approach to implement this differentiation to maximize cost-plus pricing.

**Discussion Points:**
- Analyze market conditions and pricing strategies to determine competitiveness.
- Evaluate cost-to-benefit ratios for potential upgrades to attract buyers.
- Present computations for various pricing scenarios to uphold profit margins while maintaining market alignment.
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Transcribed Image Text:**E8-19A Pricing Decisions Given Two Scenarios** **Overview:** Dominic Builders constructs 1,500-square-foot starter tract homes in the rapidly expanding suburbs of Atlanta. Due to inexpensive land and labor and intense competition among developers, the homes are "cookie-cutter," with any upgrades added by the buyer after the sale. **Cost Breakdown:** - Land: $52,000 - Construction: $122,000 - Landscaping: $6,000 - Variable marketing costs: $3,000 **Profit Goal:** Dominic Builders aims to achieve a profit of 14% of the variable cost of each home sale. Competing builders are selling similar homes for $202,000 each. **Requirements:** 1. **Pricing Strategy:** - Discuss the optimal pricing strategy Dominic Builders should adopt, explaining the rationale behind the choice. 2. **Profit Target Feasibility:** - Analyze if Dominic Builders can meet its profit targets by demonstrating necessary calculations. 3. **Upgrading Strategy Analysis:** - Kitchens and bathrooms are key selling features. Consider a strategy where Dominic Builders upgrades these areas at a cost of $20,000 per home and raises the selling price by $35,000. - Since such upgrades typically enhance home value significantly (150% of their cost), evaluate the best approach to implement this differentiation to maximize cost-plus pricing. **Discussion Points:** - Analyze market conditions and pricing strategies to determine competitiveness. - Evaluate cost-to-benefit ratios for potential upgrades to attract buyers. - Present computations for various pricing scenarios to uphold profit margins while maintaining market alignment.
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