Katutura Mahangu Mill: Taking a Supermarket Contract Under Cash Pressure
Ndapewa owns Katutura Mahangu Mill, a sole trader in Windhoek that mills mahangu flour with three staff. Current monthly sales are 9,000 kg at N$18/kg, mainly to informal retailers who pay cash. Variable cost is N$11/kg and fixed costs are N$42,000 per month; capacity is 15,000 kg. A supermarket chain offers a six-month contract for 4,000 kg per month at N$15/kg. The chain requires Namibia Standards Institution certification costing N$35,000, new packaging costing N$120,000, and 60-day payment terms. Ndapewa has N$55,000 cash, a N$100,000 overdraft limit at 13.5% annual interest, and her delivery vehicle needs a N$28,000 repair. Informal customers accept current packaging and pay immediately. The contract would use spare capacity but requires a second shift supervisor at N$6,500 per month. She must decide within two weeks.
1. Calculate the monthly contribution from the supermarket contract and compare it with using the same 4,000 kg of capacity for informal sales. Treat the supervisor as an incremental fixed cost and ignore the one-off costs for this part.
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Contract contribution
- Revenue: 4,000 kg x N$15 = N$60,000
- Variable cost: 4,000 kg x N$11 = N$44,000
- Contribution before supervisor: N$16,000
- Less supervisor: N$6,500
- Net monthly contribution: N$9,500
Informal-sales comparison
- Revenue: 4,000 kg x N$18 = N$72,000
- Variable cost: N$44,000
- Contribution: N$28,000
- No extra supervisor cost
Judgement: The contract gives N$9,500 per month of incremental contribution, while the same capacity sold informally would give N$28,000. That is N$18,500 per month better in favour of informal sales, if Ndapewa could actually sell another 4,000 kg informally. Current informal sales are only 9,000 kg, so the spare 4,000 kg may not have a ready market. The relevant question is therefore opportunity cost: the contract is positive if the spare capacity would otherwise be idle, but it is weaker than expanding informal sales if that demand exists.
2. Assess the cash-flow implications of accepting the contract. Use the figures to identify the main risk.
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Up-front cash need
- Certification: N$35,000
- Packaging: N$120,000
- Vehicle repair: N$28,000
- Total: N$183,000
Ndapewa has N$55,000 cash plus a N$100,000 overdraft, giving N$155,000. That leaves an immediate gap of about N$28,000 even before the contract starts trading.
Delay in receipts
The supermarket pays after 60 days. Monthly contract costs are 4,000 kg x N$11 = N$44,000 variable plus N$6,500 supervisor = N$50,500. Two months of costs before the first supermarket receipt = about N$101,000.
Existing business support
Current informal sales generate revenue of 9,000 x N$18 = N$162,000; variable cost is N$99,000 and fixed cost is N$42,000, leaving about N$21,000 monthly surplus. Over two months that adds roughly N$42,000.
Overall: total need is roughly N$183,000 + N$101,000 = N$284,000. Available cash plus informal surplus is about N$197,000. The shortfall is around N$87,000. The main risk is therefore liquidity, not profitability: the contract can show positive contribution but still cause a cash crisis because certification, packaging and 60-day receivables must be funded first.
3. Recommend whether Ndapewa should accept the contract, and state two conditions that would make acceptance safer.
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Recommendation: Do not accept the contract exactly as offered. It contributes positively when spare capacity is idle, but the cash shortfall of roughly N$87,000 is too large relative to the N$55,000 cash balance and N$100,000 overdraft. The vehicle repair is also essential for deliveries, so delaying it creates operational risk.
Two conditions that would make acceptance safer
- The supermarket pays for part of the certification/packaging or accepts 30-day terms, or provides a deposit. This reduces the funding gap before first delivery.
- The bank increases the overdraft facility or Ndapewa obtains an NSI grant/subsidy, and the contract is piloted at 2,000 kg per month first.
If these conditions are met, the contract can be accepted because it uses spare capacity and adds N$9,500 monthly contribution. If not, Ndapewa should keep serving informal customers, repair the vehicle, and seek a smaller supermarket order with shorter payment terms.