Diagnose a Salem foundry’s margin decline
Before the decision
Power consumption per finished tonne rose after the foundry accepted smaller batches. Sales staff kept the furnace busy with a wider range of small orders. The plant manager says those runs consume disproportionate time, but cancelling them could leave holes in the next month’s schedule.
The problem
Should the team choose Improve melt yield or Drop low-margin orders for the next 12 months?
Decision owner: The business unit lead.
Dropping orders reduces changeovers but could free capacity that sales cannot refill.
Option economics
Scroll the table to see all figures.
| Option | Volume (tonnes) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| Improve melt yield | 8,100 | 7200 | ₹190 lakh | ₹393.2 lakh |
| Drop low-margin orders | 6,300 | 9400 | ₹130 lakh | ₹462.2 lakh |
Make the call
- Calculate net contribution for Improve melt yield and Drop low-margin orders. Which assumption makes the comparison most fragile?
- If the leading option delivers 10% fewer tonnes, does your recommendation change?
- What evidence would you ask for before the team makes an irreversible commitment?
Reveal the worked solution
Start by validating Drop low-margin orders. It contributes ₹462.2 lakh after fixed costs and leads by ₹69 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 melt yield: 8,100 tonnes × ₹7,200 less ₹190 lakh in fixed costs gives ₹393.2 lakh. Drop low-margin orders: 6,300 tonnes × ₹9,400 less ₹130 lakh in fixed costs gives ₹462.2 lakh.
- Stress-test the forecast
Drop low-margin orders leads by ₹69 lakh in the base case. If Drop low-margin orders delivers 10% fewer tonnes (5,670) at the same margin and fixed cost, it contributes ₹402.98 lakh. Holding the other option constant, the stressed result still leads. 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, Drop low-margin orders needs at least 5,566 tonnes to match or beat it under the model. Estimate re-melt losses and confirm what demand could fill the freed shifts.
Dropping orders reduces changeovers but could free capacity that sales cannot refill. 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 | Improve melt yield | Drop low-margin orders | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹334.88 lakh | ₹402.98 lakh | Drop low-margin orders |
| Base assumptions | ₹393.2 lakh | ₹462.2 lakh | Drop low-margin orders |
| Both gain 10% of volume | ₹451.52 lakh | ₹521.42 lakh | Drop low-margin orders |
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