The Smiths Falls Times Company (SFTC) assembles sport watches. The watches consist of three main components: the quartz mechanism. the case. and the strap. SI-'TC sources the components from suppliers and assembles the watches in its factory. Extensive customer surveys have established that there are three functions for the watches in the niche that SF'I'C has chosen: time, water resistance and style. Time is provided by the quartz mechanism; water resistance and style are provided by the case and the strap. Replaceable batteries power all the watches. However, once the case is opened to replace the battery, the waterproof nature of the watch is usually lost. Market surveys have established three price points for three new watches that Sf-'T C now has in the design stage: (1) $30 for a basic watch, (2) $50 for a basic chronograph, and (3) $120 for a multifunction watch. SFTC has determined. given its facility-sustaining costs and its cost of capital. that the three watches must provide a margin of $4. $8 and SIS to be acceptable. Based on initial Specications. the supplier of the quartz mechanisms has quoted prices of $8. $15 and $40 for the three watches. Because these mechanisms use standard components and well-understood technology. plane-rs at SFTC consider these costs to be about as low as they can be with very little variation due either to functionality or to cost will not be wrung out of the quartz mechanism component of the watch. There are many sources for the watch straps, and prices vary widely based on functionality, which includes appearance. composition and wearability. Suppliers' quoted price ranges for the three watches as follows: 52-57. 56-59 and $20-$30. For any given level of functionality chosen. there is very little price variation among the suppliers because the watch straps are virtually commodity products and are produced very cost effectively. The case provides two critical funetions- style and water resistance. And given the commodity nature of the quartz mechanism. it is the distinguishing feature of the watch. All cases have to be guaranteed to a depth of 50 meters minimum. and customer focus groups indicate that customers find a guaranteed depth of 100 meters desirable. Depending on style and degree of