The 600-Stole Export Order
Rupali Handloom is a 12-loom unit in Sualkuchi weaving muga-silk stoles. Monthly capacity is 240 stoles; regular sales average 150 stoles at ₹1,800 each. Variable cost is ₹1,100 per stole and fixed costs are ₹84,000 a month. A Guwahati exporter offers an order of 600 stoles to be delivered over three months at ₹1,450 each, payment 60 days after delivery. The exporter's colour-matching norm is strict, and the unit's past rejection rate on such orders has been about 8%. The owner has ₹35,000 cash, no overdraft, and regular customers who expect continuity. Taking the order would mean buying yarn in bulk and possibly asking weavers to work extra hours. The exporter will not pay an advance but may agree to a 30-day payment cycle if pressed.
1. Using contribution analysis, decide whether Rupali Handloom should accept the order at ₹1,450. Show the effective cost of rejection and the opportunity cost of displaced regular sales.
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Regular business. Contribution per stole = ₹1,800 − ₹1,100 = ₹700. At 150 stoles, contribution is ₹1,05,000, leaving ₹21,000 profit after ₹84,000 fixed cost.
Effective cost of the export order. To deliver 600 good stoles at 8% rejection, production must be 600 ÷ 0.92 ≈ 653 stoles. Effective variable cost per good stole = ₹1,100 ÷ 0.92 ≈ ₹1,196. Contribution at ₹1,450 = ₹254 per good stole, or about ₹1,52,600 for the order.
Opportunity cost. Three months' capacity is 720 stoles. Regular demand for three months is 450. Producing 653 for the exporter leaves only 67 for regular buyers, displacing about 383 stoles. Lost contribution = 383 × ₹700 ≈ ₹2,68,100.
Decision. Net effect ≈ ₹1,52,600 − ₹2,68,100 = −₹1,15,500. Reject at ₹1,450. The break-even price is roughly ₹1,196 + (₹2,68,100 ÷ 600) ≈ ₹1,643, so a counter-offer above ₹1,650 is needed. A smaller order of about 250 stoles would use spare capacity and add contribution without displacing regular sales.
2. What working-capital gap does the order create, and what funding or payment terms would you negotiate?
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Production of 653 stoles needs about 653 × ₹1,100 ≈ ₹7,18,000 of variable cash over three months, before any payment is received. The exporter pays 60 days after delivery, so the unit must finance the entire order for roughly five months. With ₹35,000 cash and no overdraft, the gap is over ₹6.8 lakh - far beyond the owner's means.
Negotiation should focus on cash timing rather than only price:
- Ask for a 30% advance against a confirmed purchase order, and milestone payments at 200 and 400 stoles.
- Push for 30-day payment after each dispatch, not 60 days after final delivery.
- Seek a bank cash-credit limit or bill-discounting facility against the confirmed order.
- Ask the yarn supplier for 30-day credit and buy in phased lots.
If these terms are refused, the order is not fundable even at a better price. The owner should not use the ₹35,000 as a cushion for fixed costs while diverting it into yarn.
3. Identify two non-financial risks and state how they change your recommendation.
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- Quality and rejection risk. The 8% figure is historical; a strict colour norm could push rejection to 15%. At 15%, effective variable cost per good stole is ₹1,100 ÷ 0.85 ≈ ₹1,294, leaving only ₹156 contribution at ₹1,450. This strengthens rejection of the price.
- Weaver fatigue and regular-customer loss. Extra hours over three months raise absenteeism and defect rates, and regular buyers who are kept waiting may shift to other units. That lost goodwill is not in the calculation.
A third risk is concentration: one exporter can delay payment or reject a consignment, leaving the unit with unsold stock.
Revised recommendation: decline the 600-stole order at ₹1,450. Offer either a 250-stole pilot at ₹1,450 with a 30% advance, or 600 stoles at ₹1,650-plus with a quality clause, staged delivery and milestone payments.