The ₹7,100 wholesale offer
A ten-member women's weaving group in Sualkuchi produces muga mekhela chador sets (mekhela, chador and blouse piece). A set uses 420 g of muga yarn at ₹5,600/kg. Degumming and dyeing cost ₹260 a set; warping and sizing ₹320 a set; two weavers work five days each on one set and are paid ₹380 a day; shed rent, loom depreciation, insurance and electricity come to ₹140 a set; and 5% of the yarn is lost as waste. Retail sales at the group's own outlet bring ₹9,200 a set, but the group sells only about 6 sets a month there. Ten members working 24 days a month can produce 24 sets a month. A Guwahati wholesaler offers ₹7,100 a set for 40 sets, payment 60 days after delivery, with the group bearing transport of ₹180 a set. The group holds ₹40,000 in working capital and has no overdraft facility.
1. Prepare the cost sheet per set and calculate the break-even selling price for the wholesale order.
Read the worked answer
Cost per set
| Item | Working | ₹ |
|---|---|---|
| Muga yarn | 420 g × ₹5.6/g | 2,352.00 |
| Yarn waste 5% | 5% of 2,352 | 117.60 |
| Degumming and dyeing | given | 260.00 |
| Warping and sizing | given | 320.00 |
| Weaving labour | 2 × 5 days × ₹380 | 3,800.00 |
| Overheads | given | 140.00 |
| Total cost | 6,989.60 |
Retail: ₹9,200 − ₹6,989.60 = ₹2,210.40 margin (24.0%).
Wholesale: net realisation = ₹7,100 − ₹180 transport = ₹6,920, which is ₹69.60 below cost on every set. The offer loses money before any financing cost is counted. Sixty-day credit on ₹6,989.60 at even 12% p.a. adds roughly ₹140 a set in financing cost, widening the loss to about ₹210.
Break-even price (cost plus transport) = ₹6,989.60 + ₹180 = ₹7,169.60. A 12% margin requires 6,989.60 × 1.12 = ₹7,828 + ₹180 = ₹8,008.
2. Should the group accept? Analyse capacity and cash flow, and frame a counter-offer.
Read the worked answer
Decision: reject ₹7,100 as offered. It is below full cost, and the true comparison is not "idle looms vs order" but "does this order use capacity that would otherwise earn more?"
Capacity. 40 sets at 10 person-days per set = 400 person-days. Available: 10 members × 24 days = 240 person-days a month, so the order takes about 7 weeks and absorbs essentially all capacity, displacing the 6 retail sets a month (₹2,210 margin each = ₹13,262) - which the wholesale order does not recover.
Cash flow. Materials for 40 sets ≈ 40 × ₹2,470 = ₹98,800, plus labour, against ₹40,000 of working capital and payment 60 days after delivery. The group would run out of money before it was paid.
Counter-offer:
- ₹8,000–8,200 a set, justified by the cost sheet and a yarn-test certificate;
- 40% advance, balance on delivery, or the buyer supplies the muga yarn;
- staged delivery of 10 sets a fortnight, invoiced progressively;
- if the price cannot move, reduce to 12–15 sets alongside the retail channel.
Walk away if none of these is accepted; a loss-making order that also ties up all capacity can close a group.
3. Apart from the price, what should the group change to make this product line viable and better marketed?
Read the worked answer
1. Prove the material. Keep a fibre-test report and lot records for the muga, and use the GI protection and handloom mark on the label. Buyers pay a premium for verifiable muga; without proof the group competes with dyed imitations on price alone.
2. Cut the biggest cost honestly. Muga yarn is 34% of cost. Buy directly from rearers or in bulk with other groups, standardise set sizes to reduce waste, and record actual waste per set instead of assuming 5%. Do not cut weavers' wages to win a contract - that is a hidden subsidy.
3. Broaden the channel mix. Keep the retail outlet and exhibitions for margin, use wholesale only for genuine surplus capacity at a price above full cost, and add a lower-priced eri line for volume cash flow while the muga line stays premium.
4. Keep a costing register. Update the cost sheet whenever yarn or wage rates change, so the group knows its floor price before it enters a negotiation rather than during one.
5. Avoid debt-funded orders. Require advances on any order bigger than one month's production; a 60-day credit order financed on ₹40,000 of capital is a solvency risk, not a sales opportunity.