Costing a 300-bag tote order against a smaller, better-priced buyer
A two-person enterprise in Hubballi plans to supply 300 reusable canvas tote bags to a Bengaluru organic store. The store will pay ₹420 per bag and requires an outer printed label and an individual poly bag, adding ₹8 per bag. Cost data per bag are: canvas 0.75 m at ₹220/m (consumption already includes 10% cutting wastage); lining 0.50 m at ₹90/m; webbing 2.00 m at ₹25/m; thread, label and trims ₹15; stitching labour 0.40 hour at ₹120/hour; absorbed overhead ₹40 per bag. The order must be delivered in 10 days, which needs 40 hours of overtime at 1.5 times the normal labour rate. The enterprise's target is a 20% margin on selling price. It has idle capacity, but a second buyer has offered ₹455 per bag for 150 bags with no overtime and no extra label. The owner must decide whether to accept the store's order, negotiate, or take the second buyer's order.
1. Prepare a per-bag cost sheet for the store's order and calculate the minimum selling price needed to meet the 20% margin-on-selling-price target.
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Materials: canvas 0.75 × ₹220 = ₹165; lining 0.50 × ₹90 = ₹45; webbing 2.00 × ₹25 = ₹50; thread, label and trims = ₹15; extra printed label and poly bag = ₹8. Total material = ₹283. Labour = 0.40 × ₹120 = ₹48. Overtime: 40 hours × ₹180 = ₹7,200 for 300 bags = ₹24 per bag. Overhead = ₹40. Total cost = 283 + 48 + 24 + 40 = ₹395 per bag.
At ₹420, profit = ₹25 per bag, which is 25/420 = 6.0% margin on selling price, well below the 20% target. The target selling price is cost ÷ (1 − 0.20) = 395 ÷ 0.80 = ₹493.75, say ₹494. Alternatively, if the owner wants a 20% mark-up on cost rather than margin on selling price, the price would be 395 × 1.20 = ₹474, so the definition of 'margin' must be clarified before quoting. The store's offer is below both interpretations.
2. Compare the store's order with the second buyer's offer and recommend a decision. Show the contribution reasoning, not just the profit totals.
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Second buyer: material without the extra label/poly bag = 165 + 45 + 50 + 15 = ₹275; labour ₹48; overhead ₹40; total = ₹363. At ₹455, profit = ₹92 per bag, margin on selling = 92/455 = 20.2%, which meets the target. Total profit for 150 bags = ₹13,800.
Store order: profit ₹25 per bag × 300 = ₹7,500, but it consumes 120 regular labour hours plus 40 overtime hours. The second buyer consumes 60 regular hours. If the enterprise can do only one order in the 10-day window, the second buyer is clearly better on both margin and labour productivity. Even if the store order is treated as incremental, the overtime and extra packaging turn a potentially attractive order into a low-margin one. Recommendation: take the second buyer's 150-bag order; offer the store a counter-quote of at least ₹494 (or ₹475 if they insist on cost-plus pricing), and decline if the store will not move. Accepting ₹420 only makes sense as a strategic first order if overtime can be eliminated and the store promises repeat volume, and even then the owner should record the true cost so the low price does not become the benchmark.
3. Suggest two practical cost-reduction measures and calculate their approximate effect. State one care instruction and one record the enterprise should keep.
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Measure 1: improve marker planning to reduce canvas wastage from 10% to 5%. Current gross canvas is 0.75 m; net fabric is 0.75/1.10 = 0.682 m. At 5% wastage, gross = 0.682 × 1.05 = 0.716 m, saving 0.034 m × ₹220 = ₹7.50 per bag. Measure 2: negotiate webbing from ₹25/m to ₹23/m, saving ₹4.00 per bag. Together these save about ₹11.50 per bag, or ₹3,450 on 300 bags. A third measure is eliminating the 40 hours of overtime by pre-cutting and using a temporary stitcher; that saves ₹24 per bag, far more than the material savings.
Care instruction for the canvas bag: 'Spot clean or hand wash cold; do not bleach; dry flat away from direct sunlight; warm iron if needed.' Record to keep: a cost sheet for every order showing actual material, labour, overtime and overhead, plus the purchase bills and the quoted price. This record lets the owner see whether the ₹420 order really covered its costs and supports the next negotiation.