Quoting 300 MS flanges and judging a ₹330 counter-offer
A small job shop near Nashik is quoting to machine MS flanges from black bar. The drawing calls for a Ø150 × 25 mm flange, rough and finish turned on the face and OD, then four Ø14 mm holes drilled on a pitch circle. The blank is cut from 2.1 kg of MS bar at ₹80/kg; finished weight is 1.6 kg and swarf sells at ₹25/kg. Trial-run process times are 14 min on the centre lathe (machine plus labour rate ₹450/h) and 4 min on the drilling machine (₹350/h). Setup takes 1.5 h on the lathe and 0.5 h on the drill. The shop's quotation practice adds 5% for rejection and 15% profit on cost. The lathe is currently loaded to about 40% of two-shift capacity and the drill to 60%. For an order of 300 pieces the shop quoted its normal price; the customer has now asked for 500 pieces at a flat ₹330 each, delivery six weeks, payment 45 days.
1. Build the cost per piece for the 300-piece order and state the quotation price, showing why rejection is treated by division rather than by addition.
Read the worked answer
| Element | Working | ₹ per piece |
|---|---|---|
| Material net of swarf | 2.1 × 80 = 168.00, less 0.5 × 25 = 12.50 | 155.50 |
| Turning | 14/60 × 450 | 105.00 |
| Drilling | 4/60 × 350 | 23.33 |
| Setup amortised | (1.5 × 450 + 0.5 × 350)/300 = 850/300 | 2.83 |
| Cost before rejection | 286.66 | |
| Cost per good piece at 5% rejection | 286.66 / 0.95 | 301.75 |
| Add 15% profit | 301.75 × 1.15 | 347.01 |
Quote ₹347–350 per piece.
Why divide by 0.95 rather than add 5%. A rejected flange still consumes its full material, turning and drilling time; that money is spent and cannot be recovered from the scrapped part. The good pieces must therefore carry the cost of the bad ones. Dividing by (1 − rejection rate) gives the true cost base per saleable piece, and 286.66 × 1.05 = 301.0 would understate it by about ₹0.75 per piece - small here, but it grows quickly at higher rejection rates, which is exactly where quotations go wrong. The divided figure is also the correct base against which any counter-offer must be judged.
2. The customer offers ₹330 per piece for 500 pieces. Accept or refuse? Support the answer with numbers and list the conditions you would attach.
Read the worked answer
Judge the offer on contribution, not on full cost.
Variable cost per good piece = (155.50 + 105.00 + 23.33) / 0.95 = 283.83 / 0.95 = ₹298.77. Contribution = 330 − 298.77 = ₹31.23 per piece; over 500 pieces that is ₹15,615, less the one-off ₹850 setup = ₹14,765 net contribution.
Setup is excluded from the per-piece variable cost because it is a single fixed outlay for the whole order; it is deducted once from the total contribution, not from each piece.
With the lathe at 40% and the drill at 60% of two-shift capacity, the order displaces no other work, so there is no opportunity cost - ₹14,765 of contribution is better than idle machines. Accept, with conditions:
- Confirm capacity: 500 × 14 min = 117 lathe hours plus setup, and 33 drill hours, must fit into six weeks at existing free time; overtime would consume the contribution.
- Check working capital: 45-day credit on about ₹1.65 lakh of invoicing may cost a noticeable slice of ₹14,765 in interest.
- Record ₹330 as a one-time introductory rate for this lot only, or every future 300-piece enquiry will be negotiated down to it.
- Run a 20-piece pilot before committing: at 10% rejection the variable cost per good piece rises to 283.83/0.90 = ₹315.37 and the contribution almost halves.