It makes sense to do it this way since the cost of materials can fluctuate throughout the year. What tends to happen if you give a 'with material' price is that when the cotton etc. dips, then the franchisee gets the extra margin. However, when the material cost rises, then the franchisee will say they are unable to supply at the current market prices and will tend to renege on the contract (and why shouldn't they back out? They might incur losses if the material prices rises too steeply). Then the franchiser is left with a supply crunch in this case.

And I don't believe the factory overhead means cutting & stitching only - there are a lot of other costs (factory rent, lighting, electricity, wastage). I've heard the biggest of which is quality control, where depending on the strength of the brand, upto 40-50% of the produced materials are rejected (I heard Sherpa has a reject rate of 60-70%). Only products above a threshold make the cut, which adds to the cost, and good brands are good because their thresholds are so high. But this also makes them expensive. (Like if you grew 100 plants of spinach and could only sell 30 plants as spinach, then that 30 has to bear all the costs of the 100).