The Table Runner Export Order: 10% Margin Against a Capacity Wall
Two partners run a small made-ups unit in Amritsar with 12 sewing machines and 18 workers. They receive an export enquiry for 2,000 cotton table runners, 33 × 180 cm, hemmed with mitred corners, at USD 2.40 per piece FOB. Fabric is 100% cotton poplin, 120 GSM, 110 cm wide, at ₹110 per metre, and each runner consumes 0.65 m including 8% wastage. Thread and trims cost ₹6 per piece, labour ₹60, power and overheads ₹15, and packing ₹5. Rejection is expected at 4%. Freight and documentation for the lot is ₹18,000, and the buyer's agent takes 3% commission on FOB. The exchange rate is ₹83 to the dollar. The unit can make 100 pieces a day at full capacity, but existing orders already take 40% of capacity, and the buyer's delivery window is 20 days with payment 45 days after shipment. Fabric must be paid for within 15 days.
1. Compute the cost per piece and the margin on the order, showing each step.
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Revenue 2,000 × USD 2.40 × ₹83 = ₹3,98,400, i.e. ₹199.20 per piece.
Direct cost per piece
| Item | ₹ per piece |
|---|---|
| Fabric 0.65 m × ₹110 | 71.50 |
| Thread and trims | 6.00 |
| Labour | 60.00 |
| Power and overheads | 15.00 |
| Packing | 5.00 |
| Subtotal | 157.50 |
Rejection: you must make 2,000 / 0.96 = 2,084 pieces to ship 2,000. Cost per good piece = 157.50 / 0.96 = ₹164.06.
Add-ons
- Freight and documentation: ₹18,000 / 2,000 = ₹9.00
- Commission: 3% of ₹199.20 = ₹5.98
Total cost = ₹179.04. Margin = ₹199.20 − ₹179.04 = ₹20.16 per piece, about 10.1% of price, or ₹40,320 on the order.
A 10% margin is thin for a first order with mitred corners, which are a new operation for this unit and may reject at more than 4%.
2. Assess the delivery and cash position, and recommend whether to accept, negotiate or decline.
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Capacity is the binding constraint. Full capacity is 100 pieces a day; 40% is already committed, leaving 60 a day. In 20 days the unit can make 1,200 pieces - 800 short.
Options and their cost:
- Second shift or 12-hour days for the run: possible, but only if workers are available and overtime is legal and costed.
- Subcontract 800 pieces at, say, ₹85 CM against ₹75 in-house: extra ₹8,000, cutting profit to about ₹32,300. Acceptable only with the partners' own quality check on the subcontracted pieces.
- Ask for a 34-day delivery: cheapest option, but the buyer may refuse.
Cash: fabric and trims for 2,084 pieces = 2,084 × ₹77.50 ≈ ₹1,61,510, payable in 15 days. The buyer pays 45 days after shipment, so there is a gap of roughly two months. Check the overdraft or credit line; interest of about ₹2,500–3,000 on that gap must also come out of the margin.
Recommendation: accept only with the 800 pieces subcontracted or a second shift confirmed in writing, plus a 20–30% advance. Otherwise negotiate the price to about USD 2.55 and the delivery to 30 days, or decline. Do not accept on the assumption that capacity will somehow appear.
3. Beyond the arithmetic, what non-cost factors should the partners weigh before signing?
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- New-operation risk: mitred corners and long hems are new for this unit. Ask for a pre-production sample approval and budget a higher rejection rate for the first 300 pieces.
- Quality regime: who inspects, at what AQL, and who pays for a failed inspection or re-inspection.
- Capacity conflict: the existing orders also have dates. Taking this order may delay regular buyers who provide repeat business.
- Fabric lead time and shade continuity: 120 GSM poplin in one shade across 2,000 pieces; confirm the mill can supply a single lot.
- Payment security: LC or ECGC cover, buyer credit history, and who bears bank charges.
- Exchange-rate exposure: a ₹2 movement in the rupee changes revenue by about ₹4,000 on this order; a forward cover has a cost.
- Strategic value: whether the buyer has repeat programmes that justify a thin first order.
- Wage compliance: confirm that ₹60 per piece is consistent with the Punjab minimum wage for the skill and the actual output rate; if the assumed output is optimistic, the labour cost is understated.