Cushion-Cover Unit: Break-Even and the Marketplace Commission Offer
A final-year student of a vocational apparel course wants to set up a small unit making five-piece sets of 40 × 40 cm cushion covers with zips. A local market survey gives a selling price of ₹550 per set. Her costing is: fabric at ₹180 per metre with 1.8 m needed per set, zip and thread ₹25, stitching by a hired tailor at ₹60 per set, and packaging and labels ₹15. Monthly fixed costs are shop rent ₹6,000, electricity ₹1,500, depreciation on two machines ₹500, and transport and miscellaneous ₹1,000. She expects to sell 150 sets a month through two local shops and has ₹40,000 of family capital as working fund. An online marketplace has offered a listing but charges 15% commission on the selling price and requires GST registration, branded packaging and a 7-day return policy.
1. Calculate the variable cost per set, contribution, monthly fixed cost, break-even quantity and profit at 150 sets, showing the arithmetic.
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Variable cost per set
- Fabric: 1.8 m × ₹180 = ₹324
- Zip and thread: ₹25
- Tailor (piece rate): ₹60
- Packaging and labels: ₹15
- Total variable cost = ₹424
Fixed cost per month
- Rent 6,000 + electricity 1,500 + depreciation 500 + transport/misc 1,000 = ₹9,000
Contribution and break-even
- Contribution per set = 550 − 424 = ₹126
- Break-even quantity = fixed cost ÷ contribution = 9,000 ÷ 126 = 71.4 → 72 sets per month
- Break-even sales value ≈ 72 × 550 = ₹39,600
Profit at 150 sets
- Total contribution = 150 × 126 = ₹18,900
- Less fixed cost ₹9,000 = profit ₹9,900 per month
Interpretation
- Margin of safety = (150 − 72) ÷ 150 = 52%, which is reasonably comfortable but thin in absolute terms: a fall of about 38 sets in a month wipes out the profit.
- The ₹40,000 working fund covers roughly 2.5 months of fixed cost plus one order cycle of material, so cash is adequate only if the two shops pay within 30 days. Payment terms must be agreed in writing before the first delivery.
2. Evaluate the online marketplace offer numerically and recommend what she should do before accepting it.
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The numbers
- Commission = 15% of ₹550 = ₹82.50
- Net realisation = 550 − 82.50 = ₹467.50
- New contribution = 467.50 − 424 = ₹43.50 per set
- New break-even = 9,000 ÷ 43.50 = 206.9 → 207 sets per month, against an expected 150
- Result at 150 sets: (150 × 43.50) − 9,000 = 6,525 − 9,000 = a loss of ₹2,475 per month
- Return and reshipping costs would make it worse: a single returned set at ₹43.50 contribution needs about five extra sales just to recover the freight and repacking.
Conclusion: the offer is loss-making at the current price and volume, so it must not be accepted on the present costing.
Options, in order of preference
- Raise the online price only. Required price P where 0.85P − 424 = 126 → P = 550 ÷ 0.85 ≈ ₹647, i.e. about ₹650, with the online channel priced separately from the local shops.
- Cut variable cost. Bulk fabric buying at ₹150/m saves ₹54 per set (324 → 270), lifting contribution to ₹97.50 and pulling online break-even down to about 93 sets - but she must first check the cheaper fabric's shrinkage and colourfastness.
- Reduce the tailor rate or raise output per set by nesting the five covers more tightly in the 1.8 m lay.
- Enter the marketplace only as a trial of 50 sets with the higher price, after GST registration and packaging are in place, and review the return rate after 60 days.
3. What records, registrations and operating controls should she put in place before taking the first order?
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Registrations and compliance
- Udyam (MSME) registration - free, gives her a business identity and access to MSME schemes and easier current-account opening.
- GST: registration is generally required once turnover crosses the threshold for goods, and practically required by e-commerce platforms and by shop customers who want input credit; check the current threshold for her state.
- Current account in the unit's name, kept separate from household money; shop and establishment registration if a premises is taken, and a written piece-rate agreement with the tailor.
Records to maintain from day one
- Purchase invoices for every metre of fabric and trims, with lot numbers and the mill's shrinkage/fastness report.
- A simple cost sheet per set (material, labour, packaging, overhead) revised monthly - this is what proved the marketplace deal unviable and will keep proving it.
- Sales register, receivables ledger and a monthly cash-flow statement; a stock card for fabric so wastage and pilferage show up.
- Defect and return log, with the reason and the remedy, because returns are the biggest hidden cost in online selling.
Quality and operating controls
- An approved sample signed by each buyer; a size and seam-allowance standard for the 40 × 40 cm covers (finished 40 cm plus 1 cm seam allowance plus zip allowance).
- Pre-shrink or buy pre-shrunk fabric and wash-test one set before bulk cutting.
- Photograph and label every batch, and keep one retained set for claims.
Why this matters: the ₹9,900 monthly profit assumes zero returns and no wastage; every uncontrolled rupee of rework or return comes straight off that figure.