Pricing a blouse order when the buyer offers ₹360
A self-help group receives an order for 120 school blouses at a buyer's offered price of ₹360 per piece. The group estimates fabric consumption at 1.4 m per blouse at ₹180/m, with 8% cutting wastage; lining 0.3 m at ₹90/m; buttons, thread and interlining ₹18 per blouse; pattern making and grading ₹600 one-time; cutting labour ₹8 per piece; stitching ₹45 per piece; finishing and packing ₹7 per piece; transport ₹300 for the order; and electricity plus workshop overhead ₹1,200 for the order. The group wants a 10% profit margin on total cost. The buyer will not pay more than ₹360 and argues that the group can 'adjust' the wastage. The group has 15 days and can stitch 10 blouses a day with its three members.
1. Calculate the total cost and cost per blouse. What price should the group quote if it wants a 10% profit margin?
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Calculate per blouse and then add the one-time costs. Fabric gross consumption is 1.4 × 1.08 = 1.512 m; at ₹180/m that is ₹272.16. Lining is 0.3 × ₹90 = ₹27.00. Trims are ₹18.00. Cutting labour ₹8.00, stitching ₹45.00 and finishing/packing ₹7.00 give ₹60.00. Pattern making and grading is ₹600 ÷ 120 = ₹5.00 per blouse. Transport is ₹300 ÷ 120 = ₹2.50. Overhead is ₹1,200 ÷ 120 = ₹10.00. Total cost per blouse = 272.16 + 27.00 + 18.00 + 60.00 + 5.00 + 2.50 + 10.00 = ₹394.66. For 120 blouses the total cost is ₹47,359.20. A 10% profit margin on total cost is ₹39.47 per blouse, so the quoted price should be about ₹434.13, say ₹435 per blouse. At the buyer's ₹360, the group loses ₹34.66 per blouse, or about ₹4,159 on the order. The wastage argument is not enough: even reducing wastage to zero would save only about ₹20 per blouse, leaving a loss. The quote should be ₹435, with a negotiating floor above ₹395.
2. Should the group accept ₹360? Give a reasoned decision, including the effect on the group's time and capacity.
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On the figures given, the group should not accept ₹360 as a normal commercial order. The price is below total cost, so every blouse produced increases the loss; this is not a contribution to fixed costs because the overhead and pattern cost are included in the calculation. The capacity check also matters: 10 blouses a day for 15 days is 150 pieces, so 120 pieces fit, but the order consumes almost the whole working period. If the group accepts a loss-making order, it may have to refuse a profitable order later and may damage its cash flow. There are exceptions worth discussing: if the group is idle and the buyer guarantees repeat orders, accepting a price above variable cost could be considered as a short-term contribution, but that is not the case here because ₹360 is below the calculated cost including overhead. The group should counter-offer at ₹435, explain the cost breakdown, and offer a lower price only if the specification changes, for example buyer-supplied fabric or a simpler design. The group should not simply “adjust” wastage as the buyer suggests; wastage is already only 8% and cannot cover a ₹34.66 gap.
3. Identify three cost-reduction or negotiation options, quantify their effect, and state the risk of each.
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First, improve the marker to reduce fabric wastage from 8% to 3%. Consumption becomes 1.4 × 1.03 = 1.442 m, costing ₹259.56 instead of ₹272.16, a saving of ₹12.60 per blouse; total cost falls to ₹382.06, still above ₹360. The risk is a tight marker with grain or shade problems, so test the marker on a small cut first. Second, negotiate the fabric price from ₹180 to ₹165/m. At 1.512 m, fabric cost falls to ₹249.48, saving ₹22.68; with 3% wastage and ₹165/m, fabric is ₹237.93 and total cost is about ₹360.43, almost exactly break-even but with no profit. The risk is lower fabric quality or a supplier who cannot deliver on time. Third, simplify the design or ask the buyer to supply lining and trims, removing about ₹45 per blouse, which brings cost to about ₹349.66 and gives a small margin at ₹360. The risk is that the buyer refuses or that the school uniform specification is altered. A better negotiation is to ask ₹400 for the original specification and show the cost sheet; even with 3% wastage the cost is ₹382, so ₹400 gives a modest margin. Do not cut stitching labour below ₹45 without checking quality and fair wages.