Budgeting a Small Tailoring Business
Rahima runs a tailoring business from home. She buys cloth for 12,000 taka per month and thread and buttons for 1,500 taka. She pays a helper 4,000 taka per month. Electricity and machine repair average 1,000 taka. She sells about 40 pieces a month at an average price of 550 taka. A wholesaler offers to buy 25 pieces a month at 420 taka each, guaranteed for a year, but only if she drops her retail customers to free up time. Rahima has one machine and works about 10 hours a day; she estimates she could make at most 60 pieces a month alone, or 45 if she keeps the retail trade and also serves the wholesaler.
1. Calculate her current monthly profit and her profit if she accepts the wholesaler's offer and drops retail, and judge which is better.
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Current: revenue = 40 × 550 = 22,000 taka. Costs = 12,000 + 1,500 + 4,000 + 1,000 = 18,500 taka. Profit = 3,500 taka per month. Wholesale only: revenue = 25 × 420 = 10,500 taka. Costs fall only if she can cut cloth buying; if she keeps the helper and fixed costs, costs are still 18,500 taka, giving a loss of 8,000 taka. Even if she lets the helper go (saving 4,000) and buys less cloth, costs would be roughly 12,000 × (25/40) + 1,500 × (25/40) + 1,000 ≈ 7,500 + 940 + 1,000 = 9,440 taka, giving a profit of about 1,060 taka - far below 3,500. So dropping retail for the wholesaler is worse on these numbers. The wholesale price of 420 is below her average cost per piece (18,500 ÷ 40 ≈ 463 taka), which is the decisive fact: she would lose money on each piece sold at that price unless costs fall sharply.
2. Rahima considers serving both markets. Using her capacity estimate, decide whether this is feasible and what she should negotiate.
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Serving both means at most 45 pieces a month, so she cannot keep 40 retail pieces and add 25 wholesale pieces - that is 65, beyond even her solo maximum of 60. A feasible mix is, for example, 20 retail and 25 wholesale: revenue = 20 × 550 + 25 × 420 = 11,000 + 10,500 = 21,500 taka, costs roughly 18,500, profit ≈ 3,000 taka - slightly below her current 3,500 but with a guaranteed buyer for 25 pieces, which reduces risk. A better mix might be 30 retail and 15 wholesale if the wholesaler allows a smaller quantity. She should negotiate: (a) a higher wholesale price, at least above her cost per piece (~463 taka), ideally 480–500; (b) a smaller guaranteed quantity, such as 15 pieces; (c) a trial period of three months rather than a full year. She should also test whether a second machine or a trained helper raises capacity enough to serve both fully.
3. The wholesaler says the low price is fair because of the guaranteed order. Evaluate this argument.
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A guarantee has real value - it reduces the risk of unsold stock and gives predictable income - but that value is limited. Rahima's retail sales are already steady at 40 pieces, so the guarantee protects against a risk she does not strongly face. The price of 420 taka is below her average cost of about 463 taka per piece, so accepting it means each guaranteed piece loses money unless fixed costs are cut. A guarantee that locks in a loss is not a benefit. The fair test is: does the guaranteed price cover the variable cost of making one more piece (cloth, thread, a share of helper time) plus a contribution to fixed costs? If it does, extra wholesale pieces can add profit even at a lower price; if it does not, the order should be refused or renegotiated. On the figures given, 420 is too low, and Rahima should counter-offer rather than accept the argument.