Otjiwarongo Woodworks: Bidding for Desks Without Enough Capacity
Otjiwarongo Woodworks employs five workers and makes school desks and custom office cabinets. Job production currently yields 120 desks per month with an 8% defect rate and a 25-day lead time. Custom cabinets make up 40% of sales and carry a higher contribution per unit. A Ministry of Education tender offers 500 desks over four months at N$650 each; variable cost is N$480 per desk and fixed costs are N$95,000 per month. Batch production with new jigs would cost N$260,000, cut labour time by 30%, lift desk output to 180 per month and reduce defects to 3%, but changeovers would take two days and reduce flexibility for cabinets. The business has N$90,000 cash and can finance N$180,000 at 15% annual interest. The tender requires delivery of 125 desks per month starting in eight weeks. Custom cabinet customers accept a four-week lead time. Decide whether to bid, and whether to invest in batch production.
1. Calculate current effective monthly output of good desks and assess whether the tender can be met without batch production.
Read the worked answer
Current output is 120 desks per month, but only 92% are good:
- Good desks = 120 x 0.92 = 110.4 per month.
The tender needs 500 desks over four months = 125 good desks per month.
To deliver 125 good desks at an 8% defect rate, the business would need to produce 125 / 0.92 = 135.9 desks per month. That exceeds current capacity of 120, so the tender cannot be met without overtime, outsourcing or new capacity.
With batch production, output would be 180 desks per month at a 3% defect rate:
- Good desks = 180 x 0.97 = 174.6 per month.
This is enough for the 125-per-month tender and leaves capacity for other desk orders. However, the tender must start in eight weeks, and the jigs must be installed, tested and staff trained before then. The two-day changeovers also threaten cabinet production, which is 40% of sales and higher-margin. Capacity alone is not enough; the business must protect cabinet delivery schedules.
2. Calculate contribution per good desk under current and batch production, including defect costs, and assess whether the jig loan is covered by the tender.
Read the worked answer
Current production
To get one good desk, the business produces 1 / 0.92 = 1.087 desks. Variable cost per good desk = N$480 x 1.087 = N$521.74.
Contribution per good desk = N$650 - N$521.74 = N$128.26.
Batch production
Variable cost per good desk = N$480 / 0.97 = N$494.85.
Contribution per good desk = N$650 - N$494.85 = N$155.15.
Tender contribution at 125 good desks per month
- Current: 125 x N$128.26 = N$16,033
- Batch: 125 x N$155.15 = N$19,394
- Gain: about N$3,361 per month
Loan cost: N$180,000 at 15% = N$27,000 per year = N$2,250 per month.
The gain covers the interest cost, leaving about N$1,111 per month before depreciation and before any loss from cabinet disruption. The jigs cost N$260,000; cash plus loan gives N$270,000, leaving only N$10,000 buffer. That is very tight, especially if installation or certification costs rise. The tender improves contribution, but the loan is only comfortably covered if cabinet sales are protected and the tender is delivered without penalties.
3. Recommend whether Otjiwarongo Woodworks should bid, and state the conditions needed for the decision to work.
Read the worked answer
Recommendation: Bid only if the batch-production investment is approved and cabinet capacity is protected. Without batch production, the business cannot meet 125 good desks per month and should not bid.
Conditions:
- Negotiate a 30% advance payment or staged payments from the Ministry. This reduces the working-capital strain and gives a buffer above the N$10,000 remaining after buying the jigs.
- Schedule desk batches around cabinet orders, and possibly dedicate one worker to cabinets so that the two-day changeovers do not destroy the higher-margin custom business.
- Build a quality check before delivery. A 3% defect rate is better than 8%, but rejected desks still consume variable cost and threaten the tender deadline.
If the Ministry refuses an advance and the bank will not lend more than N$180,000, the safer decision is to decline the tender. Accepting a contract that cannot be delivered on time risks penalties and damage to the firm's reputation, which would outweigh the extra contribution.