Fund a motor redesign or distributor credit in Coimbatore?
Before the decision
A family firm has cash for one programme after two slow collection cycles. Dealers argue that additional credit will clear existing stock. Engineers say a redesign could reduce expensive warranty work, but it will take longer to show up in cash flow.
Read the companion story: When a larger project earns less on the next rupee
The problem
Should the team choose Motor redesign or Distributor credit for the next 12 months?
Decision owner: The business unit lead.
Credit expands orders faster but leaves exposure to unpaid receivables.
Option economics
Scroll the table to see all figures.
| Option | Volume (units) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| Motor redesign | 24,000 | 480 | ₹71 lakh | ₹44.2 lakh |
| Distributor credit | 29,000 | 390 | ₹59 lakh | ₹54.1 lakh |
Make the call
- Calculate net contribution for Motor redesign and Distributor credit. Which assumption makes the comparison most fragile?
- If the leading option delivers 10% fewer units, does your recommendation change?
- What evidence would you ask for before the team makes an irreversible commitment?
Reveal the worked solution
Start by validating Distributor credit. It contributes ₹54.1 lakh after fixed costs and leads by ₹9.9 lakh. Treat that gap as the amount of unmodelled cost or lost contribution the option can absorb before the ranking reverses.
- Frame the decision
Compare the alternatives using the same period and test the cost of committing scarce resources. Check working capital and cash timing separately before funding either option.
- Calculate both options
Motor redesign: 24,000 units × ₹480 less ₹71 lakh in fixed costs gives ₹44.2 lakh. Distributor credit: 29,000 units × ₹390 less ₹59 lakh in fixed costs gives ₹54.1 lakh.
- Stress-test the forecast
Distributor credit leads by ₹9.9 lakh in the base case. If Distributor credit delivers 10% fewer units (26,100) at the same margin and fixed cost, it contributes ₹42.79 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, Distributor credit needs at least 26,462 units to match or beat it under the model. Compare cash collections, warranty costs and repeat order quality by dealer.
Credit expands orders faster but leaves exposure to unpaid receivables. 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.
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 | Motor redesign | Distributor credit | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹32.68 lakh | ₹42.79 lakh | Distributor credit |
| Base assumptions | ₹44.2 lakh | ₹54.1 lakh | Distributor credit |
| Both gain 10% of volume | ₹55.72 lakh | ₹65.41 lakh | Distributor credit |
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