The ₹200 Export Order at Kiran Auto Components
Kiran Auto Components presses a single bracket for two-wheeler makers. Monthly capacity is 12,000 units; regular domestic demand absorbs 9,500 units at ₹240 each; variable cost is ₹165 per unit and fixed costs are ₹6,00,000 a month. A trader offers a one-month order of 4,000 units at ₹200, but export packing adds ₹8 a unit and the full quantity must ship in 25 days or a ₹40,000 late-delivery penalty applies. Filling the order means 1,500 units of regular domestic business must be refused, and two buyers have said they will move to a rival if supplies stop. The works manager argues that any price above variable cost earns profit; the accountant disagrees. Yarn supply takes 12 days to arrive and one knitting machine is due for servicing. The trader will not raise ₹200 but will accept a smaller quantity.
1. Evaluate the 4,000-unit offer at ₹200 using contribution analysis and recommend what Kiran should do.
Read the worked answer
Spare capacity first. 12,000 − 9,500 = 2,500 units can be made with no displacement.
Contribution per unit: domestic = 240 − 165 = ₹75; export = 200 − 165 − 8 = ₹27.
Making 4,000 units uses the 2,500 spare units (gain 2,500 × 27 = ₹67,500) and displaces 1,500 domestic units (loss 1,500 × 75 = ₹1,12,500). Fixed cost of ₹6,00,000 does not change, so it is irrelevant here.
Net effect = 67,500 − 1,12,500 = −₹4,500. The order is marginally loss-making, not profitable as the works manager claims: his rule ignores contribution lost on displaced sales.
Because ₹4,500 is small against monthly contribution of roughly ₹17 lakh, non-financial factors decide. The 25-day deadline against a 12-day yarn lead time plus a machine due for servicing creates a ₹40,000 penalty risk - nine times the gain - and losing two regular buyers costs more than one month's order.
Recommendation: offer 2,500 units at ₹200 (a clean gain of ₹67,500) and quote ₹202–205 for the balance, or accept 4,000 only if servicing is rescheduled and yarn pre-ordered.
2. Calculate the price per unit at which the full 4,000-unit order leaves Kiran exactly as well off as selling only to domestic buyers.
Read the worked answer
Total contribution must equal what 9,500 domestic units would have earned: 9,500 × ₹75 = ₹7,12,500.
With the order, only 8,000 domestic units are sold: 8,000 × 75 = ₹6,00,000.
Contribution still needed from the 4,000 export units = 7,12,500 − 6,00,000 = ₹1,12,500, i.e. ₹28.125 per unit.
Export variable cost = 165 + 8 = ₹173. Break-even price = 173 + 28.13 = ₹201.13.
Check: 4,000 × 28.13 = ₹1,12,520, plus ₹6,00,000 = ₹7,12,520, effectively unchanged.
This shows why a flat refusal is poor negotiating: ₹200 loses only ₹4,500, and every rupee above ₹201.13 adds about ₹4,000 of profit. The negotiating range is narrow but real, so a counter-offer near ₹202 plus a firm delivery schedule is the sensible move.