Why did a Kanpur footwear line lose margin?
Before the decision
A growing wholesale order book hid a fall in margin on leather uppers. The commercial team blames discounts, while production blames lower cutting yield on a new set of styles. The two teams use different reports and have yet to reconcile the same purchase orders.
Read the companion story: The sales record with a smaller profit
The problem
Should the team choose Improve cutting yield or Raise list price for the next 12 months?
Decision owner: The business unit lead.
A price increase could lose dealers whose reorder frequency matters more than invoice size.
Option economics
Scroll the table to see all figures.
| Option | Volume (pairs) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| Improve cutting yield | 1,05,000 | 143 | ₹24 lakh | ₹126.15 lakh |
| Raise list price | 92,000 | 162 | ₹14.5 lakh | ₹134.54 lakh |
Make the call
- Calculate net contribution for Improve cutting yield and Raise list price. Which assumption makes the comparison most fragile?
- If the leading option delivers 10% fewer pairs, does your recommendation change?
- What evidence would you ask for before the team makes an irreversible commitment?
Reveal the worked solution
Start by validating Raise list price. It contributes ₹134.54 lakh after fixed costs and leads by ₹8.39 lakh. Treat that gap as the amount of unmodelled cost or lost contribution the option can absorb before the ranking reverses.
- Frame the decision
Start with price, volume, mix and cost. Reconcile the gap at the transaction or batch level before treating a forecast as an explanation of past performance.
- Calculate both options
Improve cutting yield: 1,05,000 pairs × ₹143 less ₹24 lakh in fixed costs gives ₹126.15 lakh. Raise list price: 92,000 pairs × ₹162 less ₹14.5 lakh in fixed costs gives ₹134.54 lakh.
- Stress-test the forecast
Raise list price leads by ₹8.39 lakh in the base case. If Raise list price delivers 10% fewer pairs (82,800) at the same margin and fixed cost, it contributes ₹119.64 lakh. Holding the other option constant, the stressed result falls behind. This isolates volume risk. Check whether both options would respond to the same change in demand.
- Set a decision threshold
Holding the other option’s result fixed, Raise list price needs at least 86,821 pairs to match or beat it under the model. Compare size-level scrap records with dealer reorder elasticity.
A price increase could lose dealers whose reorder frequency matters more than invoice size. Compare the cost of a limited test with the loss the business would face if the full commitment failed. Ask the team to agree the decision criterion before collecting more evidence.
Check whether your answer names the trade-off, cites a number from the exhibit and specifies a reversal condition.
What if the whole market moves?
The worked solution tests a change to one option at a time. Here, both options gain or lose the same percentage of volume. Unit contribution and fixed costs stay constant.
| Volume scenario | Improve cutting yield | Raise list price | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹111.14 lakh | ₹119.64 lakh | Raise list price |
| Base assumptions | ₹126.15 lakh | ₹134.54 lakh | Raise list price |
| Both gain 10% of volume | ₹141.17 lakh | ₹149.44 lakh | Raise list price |
Explain which option you would take forward. Check whether capacity, price or customer mix would also change as the market moves.
Practise this case as an interview