A Wholesale Order, Spare Oven Capacity, and a Helper's Wage
A small bakery bakes at most 1,750 loaves a month. Fixed costs are Rs 48,000; each loaf costs Rs 35 in flour, labour and power; the retail price is Rs 80. Current retail sales are 1,200 loaves a month. A wholesaler offers to buy 500 loaves a month at Rs 55 each, baked in the same batches and collected daily. Filling the order would require one part-time helper at Rs 6,000 a month, a cost the bakery does not currently carry. The owner will not cut retail supply to fill the wholesale order, and will not sign anything that lowers this month's profit. Retail demand is currently stable at 1,200 but a 10% seasonal rise is expected next month.
1. Compute the current monthly profit and decide whether the wholesale offer should be accepted this month.
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Current position (retail only)
- Contribution per loaf = 80 − 35 = Rs 45
- Total contribution = 1,200 × 45 = Rs 54,000
- Profit = 54,000 − 48,000 = Rs 6,000
The offer, incremental basis. The Rs 48,000 fixed cost is unaffected by the decision, so it is irrelevant to accept/reject - the test is whether the order covers its own extra costs.
- Extra revenue = 500 × 55 = Rs 27,500
- Extra variable cost = 500 × 35 = Rs 17,500
- Extra contribution = Rs 10,000
- Less the helper = Rs 6,000
- Net gain = Rs 4,000
Capacity check: 1,200 + 500 = 1,700 ≤ 1,750 ✓, so no retail loaf is displaced.
Decision: accept. Profit rises from Rs 6,000 to Rs 10,000 (a 67% increase). Note the trap: comparing Rs 55 with the Rs 80 retail price makes the order look like a loss-maker. It isn't - the Rs 80 is irrelevant once the retail sale happens anyway.
2. What is the lowest wholesale price per loaf at which the owner should still sign?
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Set the incremental profit to zero. Let p be the wholesale price.
500(p − 35) − 6,000 = 0 500(p − 35) = 6,000 p − 35 = 12 p = Rs 47
Interpretation:
- Below Rs 47, the order destroys profit → refuse.
- At exactly Rs 47, profit is unchanged at Rs 6,000 → indifferent on money; accept only for a non-financial reason (locking in a future customer, smoothing a quiet month).
- Above Rs 47, every rupee adds Rs 500 a month to profit.
Two caveats worth stating in the answer:
- The Rs 47 floor assumes the helper is hired only for this order. If the helper is needed anyway, the whole Rs 6,000 drops out and the floor falls to Rs 35.
- The floor also assumes the 500 loaves fit the oven. If they displace retail sales, the true floor rises, because each displaced loaf costs Rs 45 of contribution, not Rs 35.
3. Next month retail demand rises 10% and the wholesaler still wants 500. What should the owner do?
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Step 1 - the crunch. Retail demand next month = 1,200 × 1.10 = 1,320 loaves. Capacity is 1,750, leaving 1,750 − 1,320 = 430 loaves for the wholesaler, 70 short of 500.
Step 2 - rank the two uses of a loaf. Retail contribution Rs 45; wholesale contribution Rs 20 (55 − 35). Every loaf given to the wholesaler instead of a retail customer costs Rs 25. So retail is filled first - which the owner has already said she will do.
Step 3 - test the reduced order. 430 loaves at Rs 20 contribution = Rs 8,600, less the helper Rs 6,000 = Rs 2,600 net gain.
Step 4 - helper break-even. 6,000 ÷ 20 = 300 loaves. 430 exceeds 300, so the helper still pays for herself.
Decision: accept the order cut to 430 loaves and tell the wholesaler why. Total profit ≈ (1,320 × 45) + 2,600 − 48,000 = 59,400 + 2,600 − 48,000 = Rs 14,000, against Rs 11,400 if the order is dropped.
Judgement to state: the constraint is the oven, not the price, so the right move is to renegotiate quantity while keeping Rs 55 - not to cut the price, which would compress the Rs 20 margin toward the Rs 300-loaf break-even.