Quoting for a Private-Label Spice Batch
Sanjeev runs a small spice-packing unit near Indore. A retail chain has asked him to quote for a 100 kg batch of blended masala, and he must decide whether the order is worth taking. Grade A spice costs ₹300 per kg; Grade B costs ₹200 per kg. The buyer's kitchen team has approved a blend of Grade A and Grade B in the ratio 2:3 by weight and will not accept any other ratio. Mixing and packing destroy 5% of the blended weight as spillage and moisture, and that loss cannot be recovered. Each batch also carries a fixed packing charge of ₹1,000 - labour, pouches and sealing - whatever the output. The buyer will pay ₹265 per kg of packed, saleable output and will lift the entire quantity produced. Sanjeev's plant has spare capacity for one such batch, but every kg of packed output made for the chain displaces one kg of his regular packed product, on which he earns a contribution of ₹55 per kg after all variable costs.
1. Compute Sanjeev's cost per kg of packed, saleable output for this batch, and the price per kg at which the batch merely breaks even on a full-cost basis.
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A 100 kg blend in the fixed 2:3 ratio needs Grade A = 40 kg and Grade B = 60 kg.
Spice cost = 40 × ₹300 + 60 × ₹200 = ₹12,000 + ₹12,000 = ₹24,000, i.e. ₹240 per kg of blend. That the two figures coincide is a useful check: 240 sits exactly two-fifths of the way from 200 to 300.
Saleable output = 100 kg less 5% loss = 95 kg.
Total batch cost = ₹24,000 + ₹1,000 fixed packing = ₹25,000.
Cost per packed kg = 25,000 ÷ 95 = ₹263.16 (approximately).
So ₹263.16 per kg of packed output is the full-cost break-even price. Note the leverage: the same ₹1,000 fixed charge spread over 95 kg adds ₹10.53 per kg, and a fall in yield from 95% to 90% would raise the break-even to about ₹275 - the batch has very little room for a bad yield day.
2. Should Sanjeev accept the buyer's offer of ₹265 per kg? Support the decision with numbers.
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On a stand-alone basis the offer looks marginally positive. Revenue = 95 × ₹265 = ₹25,175. Outlay = ₹25,000. That leaves ₹175, or about 0.7% of the money at risk - a cushion thin enough that a single day of poor yield, a rejected pouch lot or a 30-day delay in payment wipes it out.
The decision, however, is not stand-alone. The plant has capacity for only one batch, and every kg packed for the chain displaces a kg of regular product earning ₹55 contribution. The 95 kg of output therefore carries an opportunity cost of 95 × ₹55 = ₹5,225.
Relative position if he accepts = ₹175 − ₹5,225 = −₹5,050. Taking the order makes him worse off by about ₹5,050 than simply running his regular line.
Verdict: reject at ₹265, unless the chain guarantees volume across several future batches that would justify adding capacity - a question the current offer does not answer.
3. What price per packed kg would make the chain's order exactly as attractive as Sanjeev's regular business?
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The comparison must include what the capacity could otherwise earn, so the required revenue is the batch outlay plus the forgone contribution:
Required revenue = ₹25,000 (spice + packing) + ₹5,225 (opportunity cost of 95 kg × ₹55) = ₹30,225.
Required price = 30,225 ÷ 95 = ₹318.16 per kg of packed, saleable output.
That is ₹53 above the buyer's ₹265, a gap of roughly 20%. Framing the answer this way is more useful to Sanjeev than quoting a percentage margin, because it converts the decision into a single negotiable number: below ₹318.20 he is effectively paying the chain for the privilege of using his own plant.
A caution on the arithmetic: the opportunity cost must be applied to saleable output (95 kg), not to the 100 kg input. Applying ₹55 to 100 kg would understate the required price by about ₹2.90 per kg and could push him into accepting a loss-making quote.