Early in 2004, the marketing director and the finance director of Lille Tissages, S.A. met to prepare a joint pricing recommendation for Item 345. After the managing director had approved their recommendation, the company would announce the price in letters to its customers. In accordance with company and industry practice, announced prices were adhered to for the year unless radical changes in the market had occurred.

Lille Tissages was located in Lille, France. It was the largest company in its segment of the French textile industry; its 2003 sales had exceeded FF96 million. Company salesmen were on a straight salary basis, and each salesman sold the full line. Most of Lille Tissages? competitors were small. Usually, they waited for Lille Tissages to announce prices before mailing out their own price lists.

Item 345, an expensive yet competitive fabric, was the sole product of a department whose facilities could not be utilized on other items in the product line. In January 2002, Lille Tissages had raised its prices from FF15 to FF20 a meter. This had been done to bring the profit per meter on Item 345 up to that of other products in the line. Although the company was a strong position financially, it would require considerable capital in the next few years to finance a recently approved long-term modernization and expansion program. The 2002 pricing decision had been one of several changes advocated by the directors in an attempt to strengthen the company?s working capital position so as to insure that adequate funds would be available for this program.

Competitors of Lille Tissages had held their prices on products similar to Item 345 at FF15 during 2002 and 2003. The industry and Lille Tissages volume for Item 345 for the years 1998-2003, as estimated by the sales director, are shown in Exhibit 1. As shown by this exhibit, Lille Tissages had lost a significant portion of its former market position. In the sales director?s opinion, a reasonable forecast of industry volume for 2004 was 700,000 meters. He was certain that the company could sell 25% of the 2004 industry total if it adopted the FF15 price. He feared a further volume decline if it did not meet the competitive price. As many consumers were convinced of the superiority of the Lille Tissages product, the sales director reasoned that sales of Item 345 would probably not fall below 75,000 meters, even at FF20 price.

During the pricing discussions, the finance director and the marketing director had considered two other aspects of the problem. The finance director was concerned about the possibility that competitors would reduce their prices below FF15 if Lille Tissages announced a FF15 price for Item 345. The marketing director was confident that competitors would not go below FF15 because they all had higher costs and several of them were in tight financial straits. He believed that action taken on Item 345 would not have had any substantial repercussions on other items in the line.

The finance director prepared estimated costs of Item 345 at various volumes of production (see Exhibit 2). These estimated costs reflected projected labor and material costs. They were based on past experience except for the estimates of 75,000 and 100,000 meters. The company had produced more than 100,000 meters in each of the last ten years, and earlier experience was not applicable because of equipment changes and increases in labor productivity.

What?s been happening to Lille Tissages? market share? Why?

Exhibit 1 Item 345, Prices and Production, 1998-2003 Volume of Production (meters) Year 1998 1999 2000 2001 2002 2003 (est.) Industry Total Lille Tissages 610,000 575,000 430,000 475,000 500,000 625,000 213,000 200,000 150,000 165,000 150,000 125,000 Price (French francs) Charged by Most Competitors Lille Tissages 20.00 20.00 15.00 15.00 15.00 15.00 20.00 20.00 15.00 15.00 20.00 20.00 Exhibit 2 Estimated Cost per Meter of Item 345 at Various Volumes of Production (in French francs) Direct labora Material Material spoilage Department expense: Directb Indirectc General overheadd Factory cost Selling & administrative expensee Total Cost 75,000 4.00 2.00 0.20 100,000 3.90 2.00 0.20 125,000 3.80 2.00 0.19 150,000 3.70 2.00 0.19 175,000 3.80 2.00 0.19 200,000 4.00 2.00 0.20 0.60 4.00 1.20 12.00 7.80 19.80 0.56 3.00 1.17 10.83 7.04 17.87 0.50 2.40 1.14 10.03 6.52 16.55 0.50 2.00 1.11 9.50 6.18 15.68 0.50 1.71 1.14 9.34 6.07 15.41 0.50 1.50 1.20 9.40 6.11 15.51 Any workers made redundant as a result of a decrease in the volume of sales of Item 345 could be economically absorbed in other departments. a Indirect labor, supplies, repairs, powers, etc. b Depreciation, supervision, etc. c Thirty percent of direct labor, consisting principally of general plant administrative costs (plant supervision, plant services, etc.) and occupancy costs d e Sixty-five percent of factory cost