Own Account or Job Work: Allocating Capacity Against a Bank Limit

How to read this sheet

Two constraints bind here and that is the whole point. Spindle hours cannot be borrowed and working capital can, so a mill that plans against one of them alone will always reach the wrong mix - own account looks better per kilogram and job work looks better per rupee, and neither statement decides anything on its own. The allocation fills the hours at whichever route pays more per hour, then moves kilograms from own account to job work in order of contribution given up per rupee released, which is exactly optimal for this structure because the substitution is continuous and runs along one axis. Read the break-even job rate as a negotiating position rather than a verdict. It is the rate at which the two routes are indifferent after capital is charged, and capital is charged at its price when the limit is slack and at what the last rupee of the limit is actually earning when it is not - which is higher, and which is why a mill with a full limit should hold out for more, not less. The count sitting at the margin of the plan will show a break-even equal to the rate it is offered; that is not a coincidence but the condition that makes the allocation optimal, and it is worth checking. What is left out matters and some of it is large. Job work carries no cotton price risk and own account carries a great deal of it, which is a real difference in the value of the two routes that no contribution figure shows. Job work customers can leave, and a mill that has converted half its capacity to conversion has a thinner order book and less pricing power than one that has not. Quality claims fall differently: spoil a customer’s cotton and the liability is not the same as spoiling your own. The conversion cost is charged identically on both routes, which is close but not exact - packing, marketing and selling costs usually differ. And nothing here is a tax position: job work and own-account sales are treated differently in most jurisdictions and that difference can be larger than the contribution gap this sheet computes.