Quoting Against a Price Below Prime Cost
After completing the course you plan a small fabrication and repair unit. Rent is Rs 4,500 a month, one helper Rs 9,000 a month, power Rs 2,500 a month, and your own drawings and supervision are costed at Rs 6,000 a month. A school asks for a quotation for 25 steel window grills, each using 1.6 m² of grill area at 4.5 kg of MS section per m², priced at Rs 78 per kg. Labour is 1.5 hours per grill at Rs 120 per hour, consumables Rs 40 per grill, overhead 12 per cent on prime cost, profit 10 per cent, and the invoice format carries 18 per cent GST. Another fabricator has quoted Rs 21,000 for the same 25 grills. The school wants a reply in two days, a GST invoice and a two-year workmanship warranty. You have Rs 40,000 of your own and a bank scheme that will lend 60 per cent of a Rs 1,80,000 project if you show a break-even calculation and a job register kept on the shop computer and backed up to cloud storage.
1. Build the quotation for the 25 grills and compare it with the competitor's price.
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Per grill:
- Material: 1.6 m² × 4.5 kg/m² = 7.2 kg × Rs 78 = Rs 561.60
- Labour: 1.5 h × Rs 120 = Rs 180.00
- Consumables: Rs 40.00
- Prime cost = Rs 781.60
- Overhead 12 per cent = Rs 93.79 → cost Rs 875.39
- Profit 10 per cent = Rs 87.54 → price before tax Rs 962.93 per grill
Lot of 25: Rs 24,073 before tax; GST at 18 per cent Rs 4,333; total Rs 28,406 (quote Rs 28,400).
Competitor: Rs 21,000 for the lot is Rs 840 per grill including tax, that is Rs 711.86 before tax. That is below our prime cost of Rs 781.60 - below material, labour and consumables alone, before a rupee of rent or salary is paid. Either the competitor is using lighter section, buying at a much better rate on volume, or buying the order at a loss to keep the school. Do not match it blindly; find out which before responding.
2. Calculate the break-even and decide what to do about the lower competitor price.
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Fixed monthly cost: 4,500 + 9,000 + 2,500 + 6,000 = Rs 22,000.
Two ways to read the price:
- Contribution view: if the helper's wage is fixed, contribution per grill = 962.93 − (561.60 + 40) = Rs 361.33, so break-even = 22,000 / 361.33 ≈ 61 grills a month, about 92 hours of work. That is achievable, but the total profit on this lot is only 87.54 × 25 = Rs 2,189, so a Rs 3,000 cut would turn the job into a loss leader.
- Overhead recovery view: the 12 per cent overhead actually collected is 93.79 × 25 = Rs 2,345 against real fixed cost of Rs 22,000, so the rate only works at about 9 such lots a month. The price is not wrong; the overhead recovery is too low for this volume.
Decision: quote Rs 28,406 and hold it. Do not cut to Rs 21,000. Instead offer phased delivery, a two-year workmanship warranty with one free re-tightening visit, and a repair-service contract for the school's furniture. Chase repair and job work, which earns a higher margin per hour, to close the fixed-cost gap. Also note the funding gap: Rs 40,000 own plus Rs 1,08,000 loan is Rs 1,48,000 against a Rs 1,80,000 project - Rs 32,000 must be found or the project cost revised before applying.
3. What records, digital practices and environmental controls must the unit put in place to keep the warranty and satisfy the bank?
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Records: a quotation register and one job card per order showing drawing revision, material batch, welder, hours and inspection result; a purchase and scrap-sale register; a cash book; and a warranty register listing serial number, date and inspection signature for each lot. A two-year warranty is only affordable if you can prove how the grills were made.
Digital practice: keep the job register and invoice format on a spreadsheet with formula-driven totals so GST cannot be mis-added, number invoices serially, and back up to cloud storage weekly with one offline copy, because the loan file asks for records. Photograph each finished lot as warranty evidence. Do not keep customer drawings or payment details on an unlocked shared phone.
Environment and compliance: MS offcuts and swarf go to a scrap dealer against a receipt, never into the drain or the vacant plot; paint and thinner residues and oily rags go to an authorised collector in closed containers; welding is done with fume extraction or good cross-ventilation. Loan file: attach the break-even figure of about 61 grills a month, the own contribution, the borrowing and a repayment plan built on margin rather than turnover - and show the Rs 32,000 gap has been closed.