Cushion Cover Studio: Break-Even, a Bulk Offer and Channel Choice
Two graduates run a small studio in Rourkela making block-printed cotton canvas cushion covers, 45 cm × 45 cm. Canvas costs ₹180 per metre at 150 cm width, and cutting trials give two covers per metre after wastage. Variable costs per cover are fabric ₹90, dye and pigment ₹15, block amortisation ₹10, tailoring ₹45, and finishing and packing ₹12. Monthly fixed overheads are ₹18,000, and practical capacity is 400 covers. Online the covers sell at ₹499; the marketplace charges 18% commission, the studio pays ₹60 shipping per order, and 6% of orders are returned at a net cost of ₹150 each. Current online sales average 150 pieces a month. A hotel chain now offers 500 covers at ₹260 each, ex-works, delivered in six weeks, with no commission, shipping or returns. For that quantity, bulk canvas would cost ₹165 per metre, tailoring ₹40, block cost ₹6 and packing ₹10 per cover. The festival selling season starts in eight weeks.
1. Calculate the unit contribution, break-even volume and margin of safety on the online channel, and interpret them.
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Retail economics per cover: price ₹499; commission 18% = ₹89.82; shipping ₹60; expected return cost 6% × ₹150 = ₹9. Net realisation = 499 − 89.82 − 60 − 9 = ₹340.18. Variable cost = 90 + 15 + 10 + 45 + 12 = ₹172. Contribution = ₹340.18 − 172 = ₹168.18, about 34% of price.
Break-even = fixed overheads ÷ contribution = 18,000 ÷ 168.18 ≈ 107 covers a month. Sales of 150 give a margin of safety of 43 covers, about 29% - positive but not comfortable, since one bad month or a return spike wipes it out. Operating profit at 150 pieces is 43 × 168.18 ≈ ₹7,200 a month.
The studio is one product, one channel, with a 6% return rate quietly costing ₹9 a cover. Any decision on the hotel offer must be judged against the ₹168 contribution, not against the ₹499 price tag.
2. Evaluate the hotel chain's offer with numbers and identify the non-financial risks.
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Bulk order costs: canvas 165 ÷ 2 = ₹82.50; dye ₹15; block ₹6; tailoring ₹40; packing ₹10; total ₹153.50. Contribution = 260 − 153.50 = ₹106.50 per cover, or ₹53,250 for 500 - a 41% contribution margin, lower per unit than online but with no commission, shipping or return risk.
Capacity is the catch. 500 covers at 400 a month takes about 6.5 weeks, using 83% of capacity during the eight weeks before the festival season, exactly when stock for the highest-margin sales should be built. Online, 6.5 weeks would yield roughly 150 × 1.5 × 168.18 ≈ ₹37,800 contribution, so the hotel order is financially better in isolation - but it starves the festival channel and creates customer concentration.
Risks: a single buyer, a fixed price, a six-week deadline and no repeat guarantee. Ask for a purchase order, 40% advance and a late-payment clause, and get a signed approved sample before cutting.
3. Recommend a decision with conditions, and set out two marketing actions to improve the online channel.
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Recommended: accept, but not exactly as offered. Counter at 300 covers at ₹285, delivered in six weeks, with the balance 200 after the festival; or 500 at ₹260 with a ten-week delivery and 40% advance. At ₹285 the contribution is 285 − 153.50 = ₹131.50, so 300 pieces give ₹39,450 while leaving capacity for festival stock. This protects both channels and tests the buyer before committing the whole workshop.
Marketing actions: raise the online price to ₹549–599 and test it - the present contribution leaves little room; add better photography on a bed setting, a story card naming the block and the printer, and bundled sets of two or four to lift order value and dilute the ₹60 shipping. Reduce returns with a dimension and care note.
Open a second channel - craft exhibitions, hotel gift shops, Instagram - so no single buyer controls the studio's year, and review contribution per channel monthly rather than revenue.