The Bulk Order That Looks Profitable
A family sweet shop near a college campus sells boxes at ₹250 each. Ingredients and packing cost ₹120 per box. Monthly fixed costs - rent ₹40,000, staff salaries ₹30,000 and electricity ₹10,000 - total ₹80,000. Normal sales are 900 boxes a month. A wedding caterer offers a one-time order of 400 boxes at ₹180 each. Filling it would require 60 hours of overtime costing ₹15,000, and the shop would have to forgo 100 boxes of regular retail sales during that week. The owner's son says yes, because ₹180 is well above the ₹120 cost per box and any sale above cost is a gain. The owner is not sure: the shop has never taken a bulk order, the caterer wants an answer today, and the wedding falls in the week before a college festival when retail demand usually peaks. The shop cannot add capacity before that week.
1. Calculate the shop's monthly break-even volume and its present monthly profit.
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Contribution per box = ₹250 − ₹120 = ₹130.
Break-even = fixed costs ÷ contribution = 80,000 ÷ 130 = 615.38, so 616 boxes a month. At 900 boxes the shop is comfortably clear of that line.
Present profit = 900 × 130 − 80,000 = 117,000 − 80,000 = ₹37,000 a month.
The figure that matters for the next decision is the ₹130 contribution, not the ₹250 price or the ₹120 cost taken alone. Fixed costs do not change whether or not the wedding order is accepted, so they should not be charged against it.
2. Evaluate the ₹180 offer using relevant (incremental) costing. Should the shop accept?
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Build the incremental picture only.
- Extra revenue: 400 × 180 = ₹72,000.
- Extra variable cost: 400 × 120 = ₹48,000.
- Extra overtime: ₹15,000.
- Lost contribution on the 100 displaced retail boxes: 100 × 130 = ₹13,000.
Net effect = 72,000 − 48,000 − 15,000 − 13,000 = −₹4,000.
The son's test - 'price above the ₹120 cost' - ignores two real costs: the extra labour the order forces and the retail margin the shop gives up because capacity is fixed that week. On a full-cost view the order looks like ₹72,000 of revenue and a healthy margin; on an incremental view it destroys ₹4,000 of value.
Recommendation: decline at ₹180, or counter with a price that clears the relevant cost.
3. At what price per box does the order become worth taking, and what non-financial factors should the owner weigh before answering?
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The order must cover its own extra costs plus the contribution forgone: 48,000 + 15,000 + 13,000 = ₹76,000. Dividing by 400 boxes gives ₹190 per box. Below ₹190 the shop is worse off than if it simply kept its retail trade.
₹190 is a floor, not a target. It leaves no margin for delay, damage or a second week of overtime, so a sensible counter would be ₹200–₹210.
Non-financial factors: the wedding falls in the pre-festival peak, when retail demand and regular customers are most valuable and stock-outs would damage the shop's reputation; a first bulk order with a caterer may open repeat institutional business, which has option value; overtime for 60 hours may tire staff during the busiest week; and payment terms matter, because a large order paid late ties up working capital. The caterer's insistence on a same-day answer is itself a pressure tactic worth resisting long enough to confirm the displaced retail volume.