Choosing a Month-Long Shirt Promotion
A garment retailer in a Tier-2 city is choosing a month-long promotion for a single shirt style. The shirt's MRP is ₹1,200, its landed cost is ₹720, and the store holds 600 pieces with no possibility of restocking before the promotion ends. Monthly fixed operating costs - rent, staff, electricity - are ₹40,000 and do not change whichever promotion is run. Two options are on the table. Option A is a straight 25% discount on the MRP. Option B is "Buy 2, Get 1 Free": a customer picking three shirts pays for two at full MRP. The store's volume without any promotion is 400 shirts a month. The manager expects Option A to lift shirt volume by 10% and Option B to lift shirt volume by 40%, and he leans towards B because it "protects the price" by never showing a discount. He wants the promotion that leaves the store better off in rupees over the month, not in percentage terms.
1. Compute the contribution per shirt and the total monthly contribution under each option, using the manager's volume assumptions.
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Option A (25% off): price = 0.75 × ₹1,200 = ₹900. Contribution per shirt = 900 − 720 = ₹180. Volume = 400 × 1.10 = 440 shirts, within the 600-piece stock limit. Total contribution = 440 × 180 = ₹79,200.
Option B (Buy 2, Get 1 Free): three shirts leave the store for ₹2,400, so realised revenue per shirt = 2,400 ÷ 3 = ₹800. Cost of all three shirts is still payable, at 3 × ₹720 = ₹2,160, so contribution per shirt = 800 − 720 = ₹80. Volume = 400 × 1.40 = 560 shirts, also within the stock limit. Total contribution = 560 × 80 = ₹44,800.
After the unchanged ₹40,000 of fixed costs, A leaves ₹39,200 of profit and B leaves ₹4,800. A is ahead by ₹34,400 despite the smaller volume uplift.
2. The manager says B "protects the price" because no discount is ever shown. Does the arithmetic support that reasoning?
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No - the framing is misleading. The customer is not paying ₹1,200 per shirt; the customer is paying ₹800 per shirt once the free unit is counted, which is a 33.3% effective discount, deeper than Option A's 25%. Because the free shirt still costs ₹720 to buy and stock, the giveaway is charged against contribution, not against a paper figure.
Put differently, "protecting the price" would matter if the constraint were a price image the store must defend, such as a brand that forbids visible markdowns. That is a marketing constraint, not a financial one, and the manager has not claimed it. On the numbers he has supplied, B halves the contribution per shirt (₹180 to ₹80) and the 40% volume uplift recovers only part of the loss.
A rough test any candidate can apply: a 1-for-3 giveaway is equivalent to a discount of 1/3, so it beats a 25% discount on depth only if the extra volume exceeds roughly 2.25 times - far beyond the assumed 40%.
3. Could Option B ever beat Option A given the store's stock position? Determine the break-even volume and check it against the constraint.
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Set B's contribution equal to A's ₹79,200 at ₹80 per shirt: required volume = 79,200 ÷ 80 = 990 shirts.
That is 2.475 times the base volume of 400 - a 147.5% uplift, not the 40% the manager assumes.
The stock constraint settles the matter. With only 600 pieces available and no restocking, the maximum contribution B can generate is 600 × 80 = ₹48,000, which is ₹31,200 short of A's ₹79,200. So even if demand under B were unlimited, the promotion could not match A within the month; the 40% assumption is not the deciding weakness at all.
The correct recommendation is Option A, and the supporting reason should be stated as the stock-limited ceiling rather than as a dispute over the demand forecast - it is a conclusion that holds whatever the manager believes about footfall.