Should the Women's Group Accept the Canteen Order at Rs 88/kg?
A 12-member women's self-help group in Bathinda makes papad in a rented shed, working 25 days a month and selling 3,000 kg loose to three wholesalers at Rs 110/kg. Per kg of papad the costs are: urad dal 0.45 kg at Rs 90/kg, spices and salt Rs 12, piece-rate labour Rs 22, fuel and power Rs 6, and transport Rs 4. Monthly rent is Rs 25,000, and the shed has no sealing machine. A government canteen offers a firm one-year order for 1,500 kg a month at Rs 88/kg, supplied in 200 g laminated pouches with printed labels. Quotations: pouches Rs 3.20 each, printed labels Rs 0.60 each, a 200-pouch-per-hour band sealer Rs 45,000, a one-time FSSAI licence upgrade Rs 4,000, and mandatory annual product testing Rs 6,000. Packing will add about Rs 3/kg in labour and will slow the existing drying area.
1. Compute the contribution per kg of the canteen order and decide whether to accept Rs 88/kg. Show the break-even quantity and the required price.
Read the worked answer
Current loose business, per kg
- Urad: 0.45 × Rs 90 = Rs 40.50
- Spices and salt: Rs 12.00
- Labour: Rs 22.00
- Fuel and power: Rs 6.00
- Transport: Rs 4.00
- Variable cost = Rs 84.50/kg; contribution at Rs 110 = Rs 25.50/kg
- Break-even = Rs 25,000 ÷ 25.50 = 980 kg/month; at 3,000 kg the group earns about 3,000 × 25.50 − 25,000 = Rs 51,500/month.
Canteen order, per kg
- Packaging: 200 g pouches means 5 pouches/kg; 5 × (Rs 3.20 + Rs 0.60) = Rs 19.00
- Packing labour: Rs 3.00
- Variable cost = 84.50 + 19.00 + 3.00 = Rs 106.50/kg
- Contribution at Rs 88 = 88 − 106.50 = −Rs 18.50/kg, a loss of Rs 27,750/month on 1,500 kg, before the Rs 45,000 machine and Rs 6,000 testing.
Decision: reject at Rs 88/kg. No volume of a negative-contribution order can improve profit; it only enlarges the loss, and it also consumes drying capacity that the profitable loose business needs.
Prices to quote
- Minimum contribution break-even: Rs 106.50/kg.
- To match the current Rs 25.50/kg contribution: Rs 132/kg in 200 g pouches.
- Fixed items to amortise: machine Rs 45,000 (say over 36 months = Rs 1,250/month) and testing Rs 500/month, i.e. about Rs 1.20/kg at 1,500 kg.
2. The canteen cannot go above Rs 95/kg. What cost levers and counter-offer would you put on the table?
Read the worked answer
Levers, with effect per kg
- Change the pack format. One kg pouches need 1 pouch/kg: at roughly Rs 6.50 plus a label, packaging falls from Rs 19.00 to about Rs 7.50, saving around Rs 11.50/kg. This is the single biggest lever.
- Buy urad directly in bulk at about Rs 82/kg instead of Rs 90 through a trader: 0.45 × Rs 8 = Rs 3.60/kg saved.
- Ex-works supply. Ask the canteen to arrange collection; saves the Rs 4/kg transport.
- Semi-automatic sealing reduces the Rs 3/kg packing labour to about Rs 1/kg at 1,500 kg.
- Full capacity use: confirm the group really has spare labour and drying space; if the order displaces loose sales, the true cost includes the lost Rs 25.50/kg contribution.
Worked counter-offer at Rs 95/kg with 1 kg packs, ex-works
- Variable cost ≈ 84.50 − 4.00 + 7.50 + 1.00 = Rs 89.00/kg; contribution Rs 6.00/kg, i.e. Rs 9,000/month.
- Less testing Rs 500/month and machine amortisation Rs 1,250/month = about Rs 7,250/month. Positive but thin, and vulnerable to any urad price rise.
Recommendation: counter at Rs 105-110/kg with 1 kg packs, or Rs 132/kg with 200 g packs; accept Rs 95 only with 1 kg packs, ex-works terms, direct urad purchase, and a written annual price-revision clause tied to urad rates.
3. Beyond the arithmetic, which compliance and operational issues must be settled before signing a one-year government supply contract?
Read the worked answer
Regulatory and labelling
- Confirm the correct FSSAI licence category for the expanded scale and complete the upgrade; the licence number and logo must appear on the label.
- Label must carry the ingredient list, nutritional information, net quantity, veg logo, batch or lot code, date of manufacture, best-before, storage instructions and the manufacturer's address.
- Schedule the annual product testing and keep the report on file; the canteen will ask for it.
Product and process
- Papad is a low-moisture product (typically below 12-13% moisture); a laminated pouch must be a genuine moisture barrier, or the papad will go soft and mouldy before the best-before date. Run a shelf-life check before committing.
- The extra 1,500 kg will strain drying area, labour rostering and the festive-season peak. Decide which customers or which months can absorb the load.
- Hygiene in the shed: hand-washing, hair covering, pest control, potable water, cleaning records, and worker training; a government buyer may inspect.
Commercial
- Payment terms and credit period, penalty clauses for short supply, and whether prices are fixed for the full year.
- Bulk raw-material contracts and a small buffer stock of urad to protect against price spikes.
- A written capacity and risk plan: what happens in the monsoon when drying slows and the canteen still expects delivery.