Break-Even and a Rush Uniform Order
A tailoring start-up has one industrial lockstitch machine and one overlocker, run by the owner and one helper. Monthly fixed costs are ₹18,000: rent ₹6,000, machine EMI ₹8,000, electricity ₹2,000 and miscellaneous ₹2,000. Each school uniform sells at ₹350; variable cost is ₹220, made up of fabric ₹140, thread and buttons ₹20, stitching labour ₹50 and packing ₹10. Practical capacity is 150 uniforms per month without overtime. With overtime the unit can reach 180, but every uniform above 150 adds ₹15 in overtime cost. The owner already has confirmed orders for 60 uniforms at ₹350 from regular customers. A school offers a rush order for 150 uniforms at ₹310 each, to be delivered in 20 days. The owner wants to know whether to accept the rush order, and if so, how many pieces and at what price.
1. Calculate the monthly break-even quantity and the contribution per uniform at the regular and rush prices.
Read the worked answer
Contribution per uniform = selling price − variable cost. At the regular price, ₹350 − ₹220 = ₹130. At the rush price, ₹310 − ₹220 = ₹90. Fixed costs are ₹18,000 per month, so break-even at the regular price is ₹18,000 ÷ ₹130 = 138.46, which means 139 uniforms. At the rush price alone, break-even would be ₹18,000 ÷ ₹90 = 200 uniforms, which is above the 180-unit overtime maximum. This already shows that the rush order cannot be judged by its price alone: at ₹310, the unit needs a large volume just to cover fixed costs, and it also has regular customers to serve.
2. Evaluate the two feasible options: 60 regular uniforms plus 90 rush uniforms at 150 units, and 60 regular uniforms plus 120 rush uniforms at 180 units with overtime.
Read the worked answer
Option 1: 60 regular + 90 rush = 150 units, no overtime. Contribution = 60 × ₹130 + 90 × ₹90 = ₹7,800 + ₹8,100 = ₹15,900. Profit = ₹15,900 − ₹18,000 = −₹2,100, a loss. Option 2: 60 regular + 120 rush = 180 units. The first 150 units have no overtime, and 30 units carry the ₹15 overtime premium. Contribution = 60 × ₹130 + 90 × ₹90 + 30 × (₹90 − ₹15) = ₹7,800 + ₹8,100 + ₹2,250 = ₹18,150. Profit = ₹18,150 − ₹18,000 = ₹150. Option 2 is barely profitable, not comfortably so. Accepting all 150 rush uniforms plus the 60 regular orders would require 210 units, which exceeds the 180-unit maximum, so that option is infeasible without a capacity change.
3. Recommend a decision and two conditions the owner should attach before accepting any rush work.
Read the worked answer
The owner should keep the 60 regular orders and accept at most 120 rush uniforms at ₹310, because that is the only feasible option that covers fixed costs, and even then profit is only ₹150. A better decision is to negotiate: ask for at least ₹320–₹330 for the rush order, or reduce the rush quantity to 90 and use the spare capacity for regular work. At ₹330, 120 rush uniforms would contribute 90 × ₹110 + 30 × ₹95 = ₹9,900 + ₹2,850 = ₹12,750 from rush work, plus ₹7,800 from regular work, giving ₹20,550 contribution and ₹2,550 profit. Conditions: first, confirm fabric availability and a written delivery schedule before accepting; second, do not promise overtime output until the helper is trained and the overlocker is checked for safe operation. The owner should also ask for part payment or a material advance, because a thin-margin rush order can damage cash flow if the school pays late.