Shreeji Furniture Works: Should It Accept a Below-Normal-Price Order?
Shreeji Furniture Works, a small workshop in Nashik, makes wooden chairs. Monthly capacity is 800 chairs; current output and sales are 600 chairs. Fixed costs are ₹4.8 lakh per month. Variable cost is ₹650 per chair and the regular selling price is ₹1,100. A hotel in Lonavala offers a one-time order for 200 chairs at ₹800 each, to be delivered in 30 days. Accepting it requires overtime and additional supervision costing ₹30,000. The workshop has no other use for the idle capacity in that month. The owner's accountant warns that the price is below the normal selling price and 'will spoil the market'. The sales manager argues that any contribution above variable cost helps. Two regular wholesalers have heard rumours of the discount and have asked whether their prices will fall. The owner must decide within a week.
1. Using the steps in decision making, evaluate whether Shreeji Furniture Works should accept the hotel order. Show the relevant figures.
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Use the decision-making steps:
- Define the problem: unused capacity of 200 chairs this month and a one-time order at ₹800.
- Set criteria: incremental profit, effect on regular price, delivery risk, strategic value.
- Identify alternatives: reject; accept as a one-time confidential order; accept only with a specification change.
- Analyse relevant costs:
- Incremental revenue = 200 × ₹800 = ₹1,60,000.
- Incremental variable cost = 200 × ₹650 = ₹1,30,000.
- Extra supervision/overtime = ₹30,000.
- Net incremental benefit = ₹1,60,000 − ₹1,30,000 − ₹30,000 = ₹0. Fixed costs of ₹4.8 lakh do not change, so they are irrelevant to this short-term decision.
- Qualitative factors: the order uses idle capacity and adds no regular sales loss, but it creates a ₹800 reference price. Two wholesalers have already heard rumours.
- Decision: reject on purely financial grounds because the net benefit is zero; accept only if the hotel order buys a strategic entry, a longer contract, or a better utilisation of otherwise idle labour. If accepted, keep it confidential and clearly one-time.
2. The accountant says the ₹800 price 'will spoil the market'. Is this a relevant consideration? How should the owner handle the wholesalers' query?
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The accountant's warning is a qualitative/relevant-cost issue of price expectation, not a fixed-cost issue. A below-normal price can become an anchor: regular wholesalers may demand ₹800, and future hotel customers may expect the same. That risk is real because two wholesalers have already heard rumours. Handling the query:
- Do not confirm a general price cut. State that any hotel offer is a one-time, separate specification with different quantity, delivery and payment terms.
- If the order is accepted, use a separate quotation, non-standard finish or packaging, and a written condition that the price is not to be quoted to other buyers.
- Communicate the regular price list to wholesalers promptly and offer a volume scheme only if it is costed.
- If the order is rejected, say the capacity is committed to regular orders; do not disclose the hotel's price. The owner should not let the accountant's slogan decide the numbers, but should let the price-expectation risk decide the communication.
3. If the hotel order is accepted, what planning premises and contingencies should be built into the production plan?
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Planning premises and contingencies:
- Premises: overtime availability, supervisor availability, raw material delivery within 10 days, machine capacity of 800 chairs, quality acceptance by the hotel, and payment within 30 days.
- Production plan: schedule the 200 chairs in the idle capacity window; set a daily output target; keep 5% buffer for rejects; inspect before packing.
- Contingencies: if overtime is unavailable, outsource only the polishing stage after quality checks; if raw material is delayed, prioritise the hotel order and delay low-margin regular stock; if the hotel rejects a batch, have a rework team and a penalty clause.
- Financial contingency: do not start until the hotel confirms the order in writing and agrees to a 20-30% advance or an LC; otherwise the ₹30,000 supervision cost and wages are at risk.
- Review points: a weekly plan-versus-actual review, with authority to stop the order if the incremental cost exceeds ₹1,60,000. This keeps the decision reversible.