The Fest Stall: Make or Buy
Three BBA students have taken a stall for ₹4,500 for a three-day campus festival. They must decide whether to make custom printed notebook bundles themselves or buy ready-made ones. Making them costs ₹60 per bundle in materials and printing, plus a one-time design fee of ₹1,800. Buying from a wholesaler costs ₹75 per bundle, but the wholesaler accepts only a firm order of 300 bundles and gives no refund for unsold stock. Either way the bundles sell at ₹100, and the ₹4,500 stall rent is payable regardless. The team's own survey suggests a 60% chance of selling 320 bundles and a 40% chance of selling only 200. Two members favour the wholesaler because the per-unit cost looks simpler and there is no design work; the third argues that unsold stock is the real risk. Accounts must be settled on the last evening of the festival.
1. Compute the break-even volume for the make-in-house option and the profit if 250 bundles are sold. Then compute the volume the wholesaler route must sell to recover its costs.
Read the worked answer
In-house: selling price ₹100 minus variable cost ₹60 gives a contribution of ₹40 per bundle. Fixed costs are the ₹4,500 rent plus the ₹1,800 design fee, i.e. ₹6,300.
Break-even = 6,300 ÷ 40 = 157.5, so 158 bundles. At 250 bundles: 250 × 40 = ₹10,000 contribution, minus ₹6,300 fixed = ₹3,700 profit.
Wholesaler: contribution is ₹100 − ₹75 = ₹25 per bundle. Because the order is firm at 300 units, the outlay is 300 × 75 = ₹22,500 plus ₹4,500 rent = ₹27,000. Break-even sales = 27,000 ÷ 100 = 270 bundles out of the 300 held. If only 250 sell, profit = 25,000 − 27,000 = a loss of ₹2,000.
The comparison is not '₹75 versus ₹60 per unit' but '₹25 of contribution with a 300-unit commitment versus ₹40 of contribution with no commitment'.
2. Using the survey probabilities, calculate the expected profit of each option and recommend one.
Read the worked answer
In-house:
- Sell 320: 320 × 40 − 6,300 = 12,800 − 6,300 = ₹6,500.
- Sell 200: 200 × 40 − 6,300 = 8,000 − 6,300 = ₹1,700.
- Expected value = 0.6 × 6,500 + 0.4 × 1,700 = 3,900 + 680 = ₹4,580.
Wholesaler (only 300 units are ever held):
- Demand 320: sell 300, revenue ₹30,000, cost ₹27,000, profit ₹3,000. The extra 20 units of demand cannot be served.
- Demand 200: revenue ₹20,000 against ₹27,000, loss ₹7,000.
- Expected value = 0.6 × 3,000 + 0.4 × (−7,000) = 1,800 − 2,800 = −₹1,000.
Recommendation: make in-house. It wins on expected value by ₹5,580, it earns more in the good case, and it loses nothing in the bad case. The wholesaler route also caps upside at 300 units, which is exactly what the survey says is likely to be too few.
3. The wholesaler later offers ₹70 per bundle for the same firm 300-unit order. Re-run the comparison and state whether the recommendation changes.
Read the worked answer
New contribution is ₹100 − ₹70 = ₹30 per bundle. Outlay becomes 300 × 70 = ₹21,000 plus ₹4,500 rent = ₹25,500.
- Demand 320: sell 300 → 9,000 contribution − 4,500 = ₹4,500.
- Demand 200: sell 200 → 6,000 contribution − 4,500 = ₹1,500... but the unsold 100 units cost ₹7,000 and are unrecoverable, so the figure is 20,000 − 25,500 = −₹5,500.
- Expected value = 0.6 × 4,500 + 0.4 × (−5,500) = 2,700 − 2,200 = ₹500.
The offer improves the wholesaler route but it is still worth only ₹500 in expectation against ₹4,580 for making in-house, and it still produces a loss in the 40% scenario. The recommendation does not change.
Note the pattern: a ₹5 cut lifts expected value by ₹1,500, but the binding problem is the 300-unit commitment, not the price. Any offer that removes the commitment or allows returns would be worth re-examining.