Costing a New Knit Fabric Order
A knitting and dyeing factory is quoting a new order for 25,000 kg of single jersey, 180 gsm, dyed and finished. The yarn price is 3.20 currency units per kg. Knitting loss is 3%, dyeing and finishing loss is 6%, and the finished fabric sells at 6.80 units per kg. Dyeing and finishing cost is 1.10 units per kg of finished fabric, knitting conversion is 0.45 units per kg of greige fabric, power and overhead are 0.30 units per kg finished, and sales and administration are 4% of sales value. The customer wants a 5% price reduction. The factory's target gross margin is 18% of sales.
1. Build the cost per kg of finished fabric and determine whether the 5% price reduction is acceptable.
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Work backwards from 1 kg finished fabric. With 6% dyeing/finishing loss, greige required = 1 / 0.94 = 1.064 kg. With 3% knitting loss, yarn required = 1.064 / 0.97 = 1.097 kg. Yarn cost = 1.097 x 3.20 = 3.51 units. Knitting conversion = 1.064 x 0.45 = 0.48 units. Dyeing and finishing = 1.10 units. Power and overhead = 0.30 units. Subtotal = 3.51 + 0.48 + 1.10 + 0.30 = 5.39 units. Sales and admin at 4% of 6.80 = 0.27 units. Total cost = 5.66 units. Profit = 6.80 - 5.66 = 1.14 units, margin = 1.14 / 6.80 = 16.8%.
The current price already falls short of the 18% target margin. A 5% reduction lowers price to 6.46 units; sales and admin becomes 0.26 units, total cost 5.65 units, profit 0.81 units, margin 12.5%. That is well below target and leaves little buffer for quality claims or currency movement. The reduction should be rejected or accepted only with a matching cost reduction.
2. Identify where the factory could recover cost to justify a partial concession.
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The largest lever is loss reduction. Yarn is the dominant cost at 3.51 units. If knitting loss falls from 3% to 2%, yarn required becomes 1.064 / 0.98 = 1.086 kg, saving 0.011 kg x 3.20 = 0.035 units. If dyeing/finishing loss falls from 6% to 4.5%, greige required becomes 1 / 0.955 = 1.047 kg, yarn required 1.079 kg, saving about 0.058 units, plus knitting conversion saving of about 0.008 units. Combined savings of roughly 0.10 units bring total cost to about 5.56 units.
Other levers: negotiate yarn price on a 25,000 kg volume, reduce power and overhead through scheduling efficiency, and trim sales and administration. Even with these, a 5% cut (0.34 units) cannot be fully offset. A defensible counter is a 2% reduction (price 6.66 units) with a commitment to loss-reduction targets, which restores margin to about 15.5% while sharing the efficiency gain with the customer.
3. Explain the risk of quoting solely on the current price and margin without sensitivity analysis.
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A single-point quote hides exposure. Yarn price is volatile; a 10% rise adds 0.35 units to cost and wipes out the entire margin at the reduced price. Loss assumptions are also optimistic if the new fabric is technically demanding. The factory should present a sensitivity table showing margin at yarn prices plus and minus 10% and at loss levels of 3%, 6%, and 9%. It should also state the validity period of the quote and a yarn-price adjustment clause. This protects the 18% target margin and gives the customer transparency, which is more credible than a flat discount that the factory cannot sustain.