Dress costing, break-even and a low-price extra order
A boutique plans a 250-unit run of a lined midi dress. Fabric is 150 cm wide at $9.60/m. The pattern's net fabric area is 2.30 m² per dress, and the marker efficiency is 82%. Lining and trims cost $6.50 combined. Labour is 2.4 hours at $11.50/hour; variable overhead is $5.40 per dress. The reject rate is 5%, and fixed run costs are $3,200. The wholesale price is $92 per good dress. A retailer offers an extra 100 dresses at $64 each; the boutique has capacity but would pay an overtime premium of $1.80 per dress. The boutique must decide whether to accept the extra order and what price to counter-offer.
1. Calculate fabric consumption, variable cost per good dress, fixed cost per good dress and total cost per good dress.
Read the worked answer
Fabric consumption: Net area ÷ (fabric width × marker efficiency) = 2.30 ÷ (1.50 × 0.82) = 2.30 ÷ 1.23 = 1.87 m per dress. Fabric cost = 1.87 × $9.60 = $17.95.
Variable cost before rejects: fabric $17.95 + lining/trims $6.50 + labour (2.4 × $11.50 = $27.60) + variable overhead $5.40 = $57.45.
Allow for rejects: only 95% of started dresses are good, so variable cost per good dress = $57.45 ÷ 0.95 = $60.47.
Fixed cost per good dress: 250 started × 0.95 = 237.5 good dresses; $3,200 ÷ 237.5 = $13.47.
Total cost per good dress: $60.47 + $13.47 = $73.94. At $92 wholesale, profit is $92 − $73.94 = $18.06 per good dress, or about $4,289 for the run.
Judgement: The fabric calculation is sensitive to marker efficiency; a 5-point drop in efficiency would add cost, so the marker must be checked before confirming the price.
2. Calculate the break-even quantity and evaluate the retailer's $64 offer.
Read the worked answer
Break-even: Contribution per good dress = $92 − $60.47 = $31.53. Fixed costs ÷ contribution = $3,200 ÷ $31.53 = 101.5 good dresses. Because yield is 95%, the boutique must start 101.5 ÷ 0.95 = 106.8, so 107 dresses, to break even.
Extra order: Revenue $64. Additional variable cost per good dress = $60.47 + $1.80 overtime = $62.27. Contribution = $64 − $62.27 = $1.73 per good dress. For 100 started, 95 good dresses give 95 × $1.73 = $164.35 total contribution.
Evaluation: The order is financially positive only marginally. It covers variable cost and contributes something to fixed costs, but a small error in fabric use, rejects or overtime would wipe out the contribution. It also risks using capacity needed for full-price orders and training staff to expect low prices.
Decision: Reject at $64 unless it is strategically important; counter-offer at least $68–$70, which gives a contribution of about $7.73–$9.73 per good dress after overtime. Do not accept on the basis of full-cost profit, because fixed costs are already covered by the main run.
3. What non-financial factors should influence the final decision, and how would you present the costing to the owner?
Read the worked answer
Non-financial factors: Capacity is available, but overtime may cause fatigue and quality problems; the reject rate could rise above 5%, eroding the thin contribution. The extra order may delay full-price production or damage the boutique's price image. The retailer may become a repeat customer, but only if the quality is maintained. Fabric availability and shade continuity also matter.
Presentation: Show a marginal-cost statement, not just a total-cost statement: extra revenue, extra fabric, labour, overtime, trims and overhead, and the contribution. State the break-even volume and the sensitivity: if rejects rise to 8%, the $64 contribution becomes negative. Recommend a counter-offer with a clear minimum price.
Judgement: A positive contribution is not automatically a reason to accept. The owner should accept only if the order uses genuinely idle capacity, does not displace full-price sales, and the counter-offer preserves a reasonable margin.