Different costs for different purposes The couturier of Fashion House wants to add a new evening dress to his assortment. He already paid for a market study to see whether his potential clients would favour yet another product in the evening dress category. The study outcome was favourable. The market research costs were € 20 000. He had his staff develop three new designs, for which the development team used a new computer system that was especially bought for this project at a cost of € 14 000.

The first design Purple Star was a further development of an old idea that was declined a year ago. The design costs for the old idea were € 18 000 and the additional costs to develop the new design were € 32 000. The design costs for the second dress Green Delight were € 44 000 and, for the third design Blue Elegance, the design costs were € 60 000. The selling prices are already set: Purple Star will be priced € 300, Green Delight € 400 and Blue Elegance € 600.

Giving these prices, sales are forecasted to be 140, 120 and 110 respectively.

1. What are the financial consequences of each design to be taken into production?

2. Which costs play a role in this decision and which costs do not? Explain your opinion.

3. What are the opportunity costs of each alternative?

4. What is the opportunity cost of doing nothing, i.e. not introducing a new model?

5. Which design should be chosen when Fashion House wants to optimise the financial outcome of the decision?