Life cycle costing, cost–based versus market–based pricing Fancy Fleece developed a new outdoor wear fleece fabric that is both wind and water resistant, but retains a soft and fuzzy feel. The research and development process was more expensive than Fancy’s managers anticipated, and the materials in the fabric are also more expensive than expected. The managers believe that if Fancy prices the fleece to cover total costs, no one will buy it. The marketing department held several focus groups with manufacturers who produce and sell winter jackets and pants to
determine an appropriate price. The marketing department also surveyed customers who recently purchased fleece jackets to determine the amount of premium they would be willing to pay for a jacket that is both wind and water
resistant. The marketing department concluded that the new fleece fabric would sell at a price that covers variable costs, but does not cover the total costs of production and development. You have been asked to help the managers
decide whether to produce the fleece and how to price it if they do produce it.
REQUIRE
D:
• A. What kind(s) of analysis would you perform for this decision?
• B. Explain whether it would generally be better for Fancy Fleece to use cost–based or market–based pricing.
• C. Identify uncertainties about how much it will cost to produce the fleece. List as many uncertainties as you can.
• D. Explain why the managers of Fancy Fleece cannot be certain that they would be able to sell the polar fleece to cover variable costs.
