Full cost or contribution: which decision is in front of you

The offer

19 March 2027, 16:40. Corvin Brands emails the sales director at Tanwir. They have a cancelled programme to place: 28,000 boy's fleece hoodies, style CVB-5507. It is the same garment Tanwir shipped them fourteen thousand of that month. Ship date 12 May, at USD 3.92.

The list price is USD 4.72. The cost sheet says the garment costs USD 4.1564 to make. So the offer is USD 0.2364 a piece below cost. The sales director's first instinct is to decline, because a factory that sells below cost goes out of business.

The April board shows 41 idle line-days. The order needs 28,000 × 18.0 = 504,000 minutes, which is 38.77 line-days. It fits almost exactly into the hole.

This is the most common consequential decision in a factory's commercial life. It is taken badly most of the time. The arithmetic is not difficult. What is difficult is knowing which arithmetic to do.

The rule, in one sentence

A cost sheet answers what a garment should be priced at. It cannot answer whether to accept a price you have been offered. For that you need the cost that would go away if you said no. And on an idle line, most of the cost on the sheet would not go away at all.

Take the sheet apart into what is avoidable and what is not.

Only USD 2.99 of that USD 4.1564 disappears if Tanwir says no. Everything else is paid either way.

The three answers

Three answers to one question. The two positive ones differ threefold, and only the larger of them describes Tanwir.

Now check it from the other side of the same coin, which is what the idle days would otherwise cost.

• Overhead those 504,000 minutes would otherwise fail to absorb: USD 15,120.00
• Wages the factory would pay for those minutes anyway: USD 17,539.20
• Sheet loss on the order: -USD 6,619.20
• Sum: 15,120.00 + 17,539.20 − 6,619.20 = USD 26,040.00

The same number, reached from the opposite direction. That is the check worth doing. The order that loses USD 6,619.20 on the sheet makes the factory USD 26,040.00 better off. Saying no does not save USD 6,619.20. It costs USD 26,040.00.

Two conditions that must both hold

The answer above is right, and it is right only if two things are true. Check both, in writing, before you accept.

One: the line is genuinely idle. Not probably idle. Not idle on today's board. If accepting Corvin means refusing a full-price order that arrives in three weeks, the alternative was never zero, and the whole comparison collapses. The right test then is not the contribution floor from lesson 3 either. It is the contribution of the order you would have to turn away. At USD 671.67 a line-day, Corvin's offer loses to every order in March's book.

So these are two different tests for two different situations. Confusing them is how this decision goes wrong in both directions.

• A line-day you cannot otherwise sell: the comparison is against zero. Anything above avoidable cost is a gain.
• A line-day somebody else wants: the comparison is against the best alternative use. The floor of USD 1,315.86 is only the minimum. The alternative order is the real hurdle.

Two: the concession does not travel. That is the whole of lesson 5. It is where this decision usually fails, and it fails eighteen months later, where nobody connects it to the email of 19 March.

What Tanwir actually did

The sales director accepted on 20 March, and he was right to. April's result was USD 26,040.00 better than it would have been. The 38.77 line-days that would have absorbed nothing absorbed USD 15,120.00 of overhead. Four hundred and ten people had work.

He also did three things that cost nothing and mattered more than the acceptance itself.

1. He put the reason in the order file, in writing: capacity fill, April 2027, 41 idle line-days, one placement, expires with this purchase order.
2. He coded the order in the ERP as a capacity-fill placement rather than a standard order, so it does not enter the price history Corvin's costing is benchmarked against.
3. He told Corvin's merchandiser the same thing in the acceptance email, in one sentence, in the same words.

Whether that was enough is the subject of the next lesson.

Act as a commercial manager in a garment factory. I have been offered an order below my full cost. I want it decided properly before I reply. The offer: buyer [BUYER], [QTY] pieces of [STYLE], price offered [AMOUNT] a piece, make window [DATES]. My cost sheet for that style: materials [AMOUNT], other direct costs [AMOUNT], standard minutes [NUMBER], direct labour rate [RATE] a minute, factory overhead rate [RATE] a minute, list price [AMOUNT]. My factory: [NUMBER] earned standard minutes per line-day, forecast idle line-days in that window [NUMBER], and my operators are [PERMANENT AND PAID WHETHER OR NOT THERE IS WORK, OR HIRED TO THE ORDER BOOK]. My fixed cost a month [AMOUNT] and the line-days I expect to sell [NUMBER]. Do the following. First, split my cost sheet into cost that goes away if I decline and cost that does not, and be explicit about which side direct labour falls on given what I told you about my operators. Second, give me three numbers: the margin on the cost sheet, the contribution if labour were avoidable, and the contribution as my factory actually is. Third, check the answer from the other direction — the sheet margin plus the overhead and wages the idle days would otherwise waste — and tell me if the two do not agree. Fourth, tell me the line-days this order consumes and whether it fits the gap. Fifth, give me my contribution floor per line-day and this order's contribution per line-day, and say plainly which of the two tests applies here and why: against an empty line, or against the best alternative order. Sixth, ask me what annual volume of business with this buyer or any related buyer could later be compared against this price, and hold the reply until I answer. Do not soften the numbers.

What to take away

1. A cost sheet prices. It does not decide. To accept or refuse an offered price you need avoidable cost, and on an idle line that is usually just materials and other direct costs.
2. In a factory with permanent operators, direct labour is not avoidable. So the textbook's incremental cost badly understates a fill-in order: USD 8,500.80 against USD 26,040.00 here.
3. Always check the answer from the other side. Sheet margin plus the overhead and wages the idle days would have wasted must equal the contribution. If it does not, one of your cost lines is misclassified.
4. Two tests, and picking the wrong one is the whole error. Against zero for a day you cannot sell. Against the best alternative order for a day you can.
5. The moment you accept, do the three things that stop the price travelling. They cost nothing on the day, and they are the only defence against lesson 5.