Kudumbashree Banana Chips: Accept the Onam Bulk Order?
The twelve-member Kudumbashree unit at Ollur, Thrissur, makes banana chips. For every kilogram of finished chips it needs 2.5 kg of raw bananas, and an additional 8 per cent of the raw bananas is lost while peeling. Raw bananas cost ₹30 a kilogram. Coconut oil, salt and masala add ₹40 per kilogram of chips; labour is ₹25 and packaging ₹10 per kilogram. The unit normally sells chips at ₹220 a kilogram. A wholesaler offers a single order of 150 kg at ₹185 a kilogram for the Onam season. To handle the order the unit must hire an extra frying unit for ₹6,000. The unit's revolving fund has ₹40,000, of which ₹18,000 is already committed to repaying a loan instalment. The members meet on Sunday to decide whether to accept the offer, bargain for a higher price, or ask for an advance before starting work.
1. Calculate the full cost of fulfilling the 150 kg order at ₹185 per kg. Show the raw-banana requirement and state the profit or loss.
Read the worked answer
Raw banana needed per kg of chips. Peeling loses 8%, so 2.5 kg of usable raw banana must come from 2.5 ÷ 0.92 = 2.717 kg purchased. At ₹30/kg this is ₹81.52.
Variable cost per kg. Raw banana ₹81.52 + oil/masala ₹40 + labour ₹25 + packaging ₹10 = ₹156.52.
Order cost. 150 × ₹156.52 = ₹23,478. Add the extra frying unit ₹6,000 = ₹29,478.
Revenue. 150 × ₹185 = ₹27,750.
Result. ₹27,750 − ₹29,478 = −₹1,728. The order makes a loss of about ₹1,728, so it should not be accepted at ₹185 unless the price or quantity changes.
2. Find the minimum order quantity that breaks even at ₹185/kg. Can the unit finance that quantity from its free revolving fund? Show the cash calculation.
Read the worked answer
At ₹185, contribution per kg = ₹185 − ₹156.52 = ₹28.48. The extra frying unit is a fixed cost of ₹6,000 for the order, so break-even quantity = 6,000 ÷ 28.48 = 210.7 kg. Since chips are sold in whole kilograms, the unit needs at least 211 kg.
Cash needed at 211 kg = (211 × ₹156.52) + ₹6,000 = ₹33,026 + ₹6,000 = ₹39,026.
Free revolving fund = ₹40,000 − ₹18,000 = ₹22,000.
Shortfall = ₹39,026 − ₹22,000 = ₹17,026. So even the break-even quantity cannot be financed from the free fund. The unit would need an advance, supplier credit or a larger working fund before accepting.
3. The wholesaler revises the offer to 250 kg at ₹200/kg. Calculate the profit and the cash gap, and recommend a condition for accepting.
Read the worked answer
Contribution per kg = ₹200 − ₹156.52 = ₹43.48. Total contribution = 250 × ₹43.48 = ₹10,870. After the ₹6,000 frying-unit cost, profit = ₹4,870.
Cash needed = (250 × ₹156.52) + ₹6,000 = ₹39,130 + ₹6,000 = ₹45,130. Free fund = ₹22,000, so the gap is ₹23,130.
The order is profitable but not affordable on the unit's own cash. A sensible condition is to accept only if the wholesaler pays an advance of at least ₹24,000, or supplies raw bananas on credit, so that production is not stopped by a liquidity shortage.