Quotation for 600 brackets with a discount request and 60-day payment
A small jobbing shop has been asked to quote for 600 steel brackets per month for six months. Each bracket takes 1.8 kg of mild steel bar at 1.20 JD per kg; the process scrap rate is 5 percent of material issued. Machining is 18 minutes on a CNC mill charged at 9.00 JD per hour; assembly is 9 minutes at 6.00 JD per hour; painting and packing is 0.95 JD per bracket. Monthly fixed overhead, including rent, supervision, insurance and depreciation, is 1,900 JD. The shop is currently running at about 70 percent of capacity, so this order would not displace existing work. The proposed selling price is 9.20 JD per bracket. The customer wants a 12 percent discount and 60-day payment terms; the steel supplier gives the shop 30 days. The bank overdraft rate is 9 percent per year. The quotation must go out tomorrow.
1. Build the unit variable cost, compute contribution at the list price and at the discounted price, and recommend whether to accept the order.
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Unit variable cost:
- Material: 1.8 kg x 1.20 = 2.16 JD; allowing for 5 percent scrap, 2.16 / 0.95 = 2.27 JD.
- Machining: 18 minutes x (9.00 / 60) = 2.70 JD.
- Assembly: 9 minutes x (6.00 / 60) = 0.90 JD.
- Paint and pack: 0.95 JD.
- Total variable cost = 2.27 + 2.70 + 0.90 + 0.95 = 6.82 JD per bracket.
Contribution:
- At 9.20 JD: 9.20 - 6.82 = 2.38 JD per unit, 25.9 percent of price. For 600 units: 1,428 JD.
- At a 12 percent discount, price = 9.20 x 0.88 = 8.10 JD: contribution = 8.10 - 6.82 = 1.28 JD, 15.8 percent. For 600 units: 768 JD.
The order still makes a positive contribution after the discount, and with 30 percent idle capacity there is no opportunity cost. On a pure marginal basis, accept. But 768 JD covers only 40 percent of the month's 1,900 JD fixed overhead, so the order cannot be treated as the shop's mainstay.
Recommendation: accept conditionally - approve the technical scope and the volume, hold the price for 30 days only because the steel price is the largest variable element, and counter-offer a 6 percent discount with 30-day payment, or the full 12 percent with payment on delivery. Record on the file that the 12 percent is a one-off for this order and this customer, so it does not become the reference price.
2. Quantify the working-capital effect of the 60-day payment terms and decide how much of the discount argument it actually settles.
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Cash exposure. Revenue per month = 600 x 8.10 = 4,860 JD. The shop pays for steel on 30-day terms but is paid at 60 days, so it funds one month of material, wages and overhead for an extra 30 days.
Approximate financing cost: 4,860 x 0.09 x 30 / 365 = 36 JD per month. If the customer's 60-day terms had to be funded from day one with no supplier credit at all, the figure would be 4,860 x 0.09 x 60 / 365 = 72 JD.
Interpretation: 36 to 72 JD per month is roughly 0.7 to 1.5 percent of revenue on this order. It is real money but it is an order of magnitude smaller than the 12 percent price concession, which costs 600 x (2.38 - 1.28) = 660 JD per month in lost contribution. The payment terms are therefore a nuisance to be priced in, not the reason to reject.
The genuine risk is credit, not interest: if the customer pays at 90 days instead of 60, the shop is financing 14,580 JD of receivables while its own supplier deadline passes. Before signing, check the customer's payment history, set a credit limit, and put a late-payment clause in the terms. The quotation should show the interest cost as a separate, small line so the customer sees that extended terms have a price.
3. List what the written quotation must contain for this order and explain how the break-even volume supports the negotiation.
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Break-even as a negotiating fact. Monthly fixed overhead of 1,900 JD divided by the list-price contribution of 2.38 JD gives 798 brackets per month just to cover overhead; at the discounted contribution of 1.28 JD it rises to 1,484 brackets. The order is 600 units, so it cannot carry the shop on its own at either price - it has to sit alongside other work. That is a strong argument for keeping the discount small, because the shop needs the margin, not just the volume.
Contents of the quotation:
- Scope: 600 brackets per month, drawing revision, material specification, finish, and the inspection or sample-approval arrangement.
- Unit price, total order value, and the discount stated explicitly as a one-off with its basis.
- Price validity, for example 30 days, with a steel price escalation clause above an agreed index movement - the material is 33 percent of variable cost, so an unprotected fixed price is a bet on the steel market.
- Payment terms, credit limit, late-payment interest, and currency if the steel is imported.
- Delivery schedule, delivery point and who pays freight and unloading.
- Quality terms: what happens on rejection, who pays rework and return freight, and the sampling basis for acceptance.
- Lead time for first article approval and the effect of any drawing change on price.
- Validity of the quoted capacity - the 600 per month is only honest if the remaining 30 percent capacity is genuinely reserved for it.
Sending numbers without the escalation clause, validity date and quality terms is how a profitable quote turns into a loss-making order six months later.