Break-even and credit decision for a women's fish pickle unit
A women's self-help group in Palghar plans a fish pickle unit. The investment is ₹3.5 lakh for a small licensed kitchen, mixer, jars and initial working capital. Fixed costs are ₹18,000 per month (rent, licence, electricity and one helper). Variable cost is ₹120 per kg of finished pickle (raw fish, spices, oil, jar and label). The selling price is ₹250 per kg. Expected local sales are 300 kg per month. The group can borrow the full ₹3.5 lakh from a bank at 12% simple interest per year, repayable over three years. A wholesaler offers to buy 500 kg per month at ₹190/kg, but only if the group supplies branded 500 g jars and accepts 30-day credit. The group has no cold storage and currently sells only at local markets.
1. Calculate the monthly break-even quantity and the margin of safety at 300 kg. Should the group take the loan? Show your reasoning.
Read the worked answer
Contribution per kg = selling price − variable cost = ₹250 − ₹120 = ₹130/kg.
Break-even quantity = fixed costs ÷ contribution per kg = ₹18,000 ÷ ₹130 = 138.5 kg, or about 139 kg per month.
At 300 kg, total contribution = 300 × ₹130 = ₹39,000. Profit before interest = ₹39,000 − ₹18,000 = ₹21,000 per month.
Loan interest = ₹3.5 lakh × 12% = ₹42,000 per year = ₹3,500 per month. Profit after interest = ₹21,000 − ₹3,500 = ₹17,500 per month. Break-even including interest = (₹18,000 + ₹3,500) ÷ ₹130 = 165.4 kg per month.
Margin of safety at 300 kg = (300 − 138.5) ÷ 300 = 53.8%, or about 161.5 kg above break-even. If interest is included, the margin is (300 − 165.4) ÷ 300 = 44.9%.
The loan looks serviceable at the expected sales level, but the margin is not huge. The group should take the loan only if it is confident of sustaining at least 200-250 kg of sales, has working capital for raw fish and receivables, and can meet food-safety and labelling requirements. A smaller loan or a phased purchase would reduce risk.
2. Evaluate the wholesaler's offer of 500 kg per month at ₹190/kg with 30-day credit. Would you accept it? What conditions would you negotiate?
Read the worked answer
At ₹190/kg, contribution = ₹190 − ₹120 = ₹70/kg. For 500 kg, contribution = ₹35,000 per month. If this is truly additional volume and fixed costs do not rise, it adds ₹35,000 of contribution before any extra interest or labour.
However, the offer is below the local contribution per kg of ₹130. If it displaces local sales, the group would lose money. Selling 300 kg locally gives ₹39,000 contribution; selling 500 kg to the wholesaler gives only ₹35,000, a fall of ₹4,000. To match the local contribution of ₹39,000 on 500 kg, the required price would be ₹120 + (₹39,000 ÷ 500) = ₹198/kg. So ₹190/kg is below the displacement break-even price.
The 30-day credit also creates receivables of 500 × ₹190 = ₹95,000, which the group must finance while buying raw fish and jars. I would accept only as additional business, not as a replacement for local sales. I would negotiate a price of at least ₹200-210/kg, 15-day credit or partial advance, a minimum purchase guarantee, clear quality and packaging specifications, and a right to review the price if raw fish costs rise. Without cold storage, the group should also confirm that the wholesaler will collect on time and that production can be scheduled to avoid spoilage.
3. Identify the three biggest risks in this enterprise and propose one practical control for each.
Read the worked answer
The first risk is raw material supply and price. Fish pickle depends on fish that is fresh enough and affordable; a price spike or a day without supply can stop production. A control is to make a forward arrangement with one or two landing centres or suppliers, agree a weekly volume and quality standard, and keep a one-month buffer of non-fish ingredients. Cold storage or a reliable ice supply would also help.
The second risk is food safety and compliance. Pickle is a processed food, and poor hygiene, wrong acidity, inadequate heating or contaminated jars can cause spoilage or illness, besides inviting regulatory action. A control is to follow a simple food-safety plan: separate washing and cooking areas, clean jars, correct acid and salt levels, batch codes, and periodic testing. The group should obtain the required licence and label the product correctly.
The third risk is cash flow, especially from the wholesaler's 30-day credit. The group may have to pay for fish and labour before it is paid. A control is to set a credit limit, invoice on delivery, follow up at 15 days, and keep at least one month of working capital. A partial advance from the wholesaler would reduce the risk further.