A festival diya order that looks big but may lose money
A self-help group in a district town has an order for 5,000 terracotta diyas from a temple committee at ₹7.50 per piece, delivered in 18 days. They have one 40-litre electric kiln and four part-time workers. Current records: clay costs ₹15/kg and 1 kg yields 18 raw diyas. Breakage and rejects average 12% from raw to finished. Each worker makes 120 diyas per 8-hour day and is paid ₹450/day. Glaze and decoration cost ₹4,000 for the order. Each kiln firing takes 8 hours and holds 900 diyas; electricity and firing labour cost ₹1,800 per firing. Packaging is ₹1.50 per delivered piece and transport ₹3,000. The group has ₹20,000 cash and must pay wages weekly. The temple committee will pay 30% advance and the balance on delivery. The group leader wants to accept because 'a big order brings reputation'.
1. Calculate the full cost per delivered diya and the profit or loss at ₹7.50. Should the group accept the order on these terms?
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Raw diyas needed: 5,000 good pieces at 12% rejects means 5,000 ÷ 0.88 = 5,682 raw diyas.
Costs:
- Clay: 5,682 ÷ 18 = 315.7 kg, so 316 kg × ₹15 = ₹4,740.
- Labour: 5,682 ÷ 120 = 47.4 worker-days, rounded to 48 × ₹450 = ₹21,600.
- Firing: 5,682 ÷ 900 = 6.31, so 7 firings × ₹1,800 = ₹12,600.
- Glaze and decoration: ₹4,000.
- Packaging: 5,000 × ₹1.50 = ₹7,500.
- Transport: ₹3,000.
Total cost = ₹53,440. Cost per delivered diya = 53,440 ÷ 5,000 = ₹10.69. Revenue at ₹7.50 = 5,000 × 7.50 = ₹37,500. The order loses about ₹15,940 before any owner's margin or contingency. It also uses the kiln for 7 firings and ties up labour for about 48 worker-days.
The group should not accept ₹7.50 on these figures. A big order at a loss is not reputation-building; it can consume cash needed for the next order. The minimum break-even price is about ₹10.70 per piece, and a 10% margin would require about ₹11.80. The group should counter-offer near ₹11.50–12.00, or reduce the specification and reject rate before signing.
2. Assess the cash-flow and capacity position. What negotiating or production changes would you propose, and what is the minimum acceptable price if the temple insists on 5,000 pieces?
Read the worked answer
Cash flow: The 30% advance is 5,000 × 7.50 × 0.30 = ₹11,250. With ₹20,000 cash, the group has ₹31,250 available. Before delivery it must pay wages (₹21,600), clay (₹4,740), glaze (₹4,000) and firing (₹12,600) - about ₹42,940 - leaving a shortfall of roughly ₹11,690 even before packaging and transport. The weekly wage rule makes this serious: the group could run out of cash before the temple pays the balance. The order is not just unprofitable; it is badly financed.
Capacity: 48 worker-days over 18 days is only about 2.7 workers fully employed, so the four part-time workers can do it; 7 firings in 18 days is also possible. Capacity is not the main constraint - price and cash are.
Proposals:
- Ask for 40–50% advance and a stage payment after the first 2,000 pieces. Without this, do not start.
- Counter-offer at ₹11.50–12.00, explaining the reject rate, firing cost and packaging.
- Reduce rejects from 12% to 6% through better drying and handling: raw need falls to 5,319, labour to about 45 worker-days, and firing to 6 loads, cutting cost to roughly ₹10 per piece. That still does not justify ₹7.50.
- Simplify packaging or ask the temple to collect, saving transport; this improves cash but not enough to close a ₹3+ per piece gap.
Minimum acceptable price: at the current process, about ₹10.70 just breaks even; with a 10% margin, ₹11.80. If the temple insists on ₹7.50, the group should decline or supply a smaller, simpler product with a separately costed specification.