Throughput Accounting 1 · Lesson 4 of 6
The low-margin order
Demand falls and the plant loses money every week. A new customer offers a price below product cost. Should you take it? Decide, run the week, and meet the first new paradigm.
A slow market
Same plant, same ₹6,000 a week. But the market has slowed: demand drops to 90 P and 25 Q a week.
Pause and think: can the plant make all of it now, and what will it earn?
- No, worker B is still short
- Yes, with room to spare, but it loses ₹450 a week
- Yes, and it makes ₹300 a week
- Yes, and it breaks even
Worker B needs 90 × 15 + 25 × 30 = 2,100 minutes, under 2,400. So there is no constraint inside the plant now: the market is the constraint. Throughput is 90 × ₹45 + 25 × ₹60 = ₹5,550, against ₹6,000 of expense: a loss of ₹450 a week.
An offer below cost
A customer from a completely new market segment offers to buy 20 P a week at ₹82 each. The new segment doesn’t overlap with your regular customers, so selling there won’t pull down your normal price.
The cost report says P costs ₹82.50. At ₹82, every unit loses 50 paise.
Before you play
The situation. You already make 90 P and 25 Q, and lose ₹450 a week. The offer is 20 extra P at ₹82.
Your decision. How many of the 20 to accept, from none to all of them. Watch the workers’ bars: you can only accept what the plant can make.
The sum that matters
Ask what changes if you accept:
- Sales rise by 20 × ₹82 = ₹1,640.
- Truly variable cost rises by 20 × ₹45 = ₹900.
- Throughput rises by ₹740.
- Operating expense doesn’t change: the workers are already paid, and worker B has 300 spare minutes, exactly enough for 20 P.
A loss of ₹450 becomes a profit of ₹290. The “50 paise loss per unit” never existed: it came from ₹37.50 of overhead that the plant pays whether it makes these 20 units or not.
The first new paradigm
A low-margin product can make a company profitable. Selling at a “loss” can turn a loss into a profit.
That doesn’t mean any price is fine. Three conditions matter:
- Spare capacity. The order must fit in time you already pay for, on every resource, and above all the constraint. Once B is full, every extra P would push out something else, and you’d have to compare their throughput per B minute.
- Segmentation. The low price must not leak into your regular market. A different customer group, region, channel, pack size or delivery terms can keep markets apart. Without segmentation, the real fear is not the order: it is your regular customers asking for ₹82 too.
- Price above truly variable cost. At anything above ₹45, P adds throughput. Below it, every unit really does lose money.
Exercise: the plant is in the slow market (90 P, 25 Q). What would you do?
- An export buyer wants 10 P at ₹70.
- A distributor offers ₹42 for 30 P.
- Your biggest regular customer asks for P at ₹80 from now on.
- A new segment wants 40 P at ₹82.
Check your understanding
Answer all five. Get four right to complete the lesson.
1. With demand at 90 P and 25 Q, where is the constraint?
- In the market: the plant can make everything it can sell
- Worker B
- Worker A
- Raw material supply
B needs only 2,100 of its 2,400 minutes.
2. Accepting 20 P at ₹82 changes throughput by…
- −₹10
- +₹1,640
- +₹740
- +₹900
20 × (₹82 − ₹45) = ₹740.
3. Why doesn’t operating expense rise when you accept the order?
- The customer pays for the wages
- The workers are already paid, and there are enough spare minutes
- Overhead is allocated to the regular products
- Accountants ignore small orders
The minutes were paid for whether they were used or not.
4. Which is NOT a condition for taking a low-price order?
- The order fits in spare capacity
- The price stays above truly variable cost
- The low price doesn’t leak into the regular market
- The price covers the full product cost
Full product cost includes allocated overhead, which doesn’t change with the order.
5. After accepting all 20, the plant’s weekly result is…
- A profit of ₹290
- A loss of ₹460
- A loss of ₹450
- A profit of ₹740
−₹450 + ₹740 = ₹290.