Export Price

8/4/2019 Export Price

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PRICING FOR EXPORTS

PRICE IS ONE OF THE IMPORTANT ELEMENTS

IN THE MARKETING MIX

WHILE OTHER Ps ARE COST-ORIENTED, IT IS

THE PRICE WHICH GENERATES REVENUE TO

THE FIRM


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TYPES OF PRICING

SKIMMING PRICING

MARKET ORIENTED PRICING

MARKET PENETRATION PRICING

PRESTIGE PRICING


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COSTS

FIXED COST

LAND

PLANT AND MACHINERY

RENT OF THE BUILDING

ADMINISTRATIVE COST

VARIABLE COST

RAW MATERIAL

LABOUR

OTHER DIRECT EXPENSES


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MARGINAL COSTING

IS THE VARIABLE COST INCURRED AS A RESULT

OF UNDERTAKING A SPECIFIC ACTIVITY. IT IS THEAMOUNT BY WHICH TOTAL COSTS ARE CHANGED

IF THE VOLUME OF OUTPUT OF A PRODUCT IS

INCREASED BY ONE UNIT.

BREAK-EVEN POINT

IS REACHED WHEN THE INCOME LINE (SALES)

CROSSES THE TOTAL COST LINE, SO THAT INCOME

AND TOTAL COSTS ARE EQUAL AND NEITHER A

PROFIT NOR A LOSS IS MADE, AND THEENTERPRISE BREAKS EVEN.

BEP = FC/SR-VC


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CONTRIBUTION

IS THE DIFFERENCE BETWEEN SALES REVENUE

AND THE VARIABLE COST OF SALES. THE

CONTRIBUTION IS MADE TOWARDS MEETING

FIXED COST AND THEN TO PROFIT.

CONTRIBUTION ANALYSIS CAN BE USED BY

MANAGEMENT FOR PROFIT PLANNING.


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EXERCISE ON MARGINAL COSTING FOR EXPORTS

A shirt manufacturer is producing one thousand shirts per month, at a

cost of Rs 6 per shirt, covering all fixed costs. Production of 200

additional shirts per month would entail additional variable costs of

only Rs 4.50 per shirt. This is the marginal cost of each additionalshirt. It is calculated as follows:

IN Rs COST OF

1000 UNITS

ADDL. COST OF

200 UNITS

Direct Materials

Direct Labour

Other variable exp.

2,000

2,000

500

400

400

100

Variable Cost

Fixed Cost

4,500

1,500

900

-

TOTAL COSTS 6,000 900

COST PER UNIT 6.00 4.50


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The difference between full unit cost and marginal unit cost would

be even larger if direct labour is paid partly by month and partly

by piece and is not fully occupied at the production level of1000 shirts per month.

Situation for exports on Marginal Costing

The above-mentioned manufacturers sells the shirts directly to

small retailers with a mark-up of 33 per cent (Rs 8/-), and to

chain-stores or wholesalers with a mark-up of 20 per cent (Rs

7.20). These mark-ups are entirely for profit. Following his

endeavours to obtain more business, the marketing manager hasreceived an inquiry from overseas for 3,600 shirts to be

produced over 9 months, but the order can be obtained only at a

price of Rs 6/- per shirt ex-factory gate. Production-wise the

order could be executed without difficulty. Should themanufacturer take the order?


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DOMESTIC

SALES

EXPORT

SALES

TOTAL

9-MONTH PRODUCTION IN

UNITS

9,000 3,600 12,600

AVERAGE SELLING PRICE

(Rs)

7.60 6.00 -

SALES REVENUE (RS) 68,400 21,600 90,000

VARIABLE COSTS (Rs) 40,500 16,200 56,700

FIXED COSTS (RS) 13,500 - 13,500

PROFIT (Rs) 14,400 5,400 19,800

PROFIT IN % OF SALES 21% 25% 22%

The statement shows that the manufacturer will get a profit of Rs

5,400 on the export sales. For the 9-month period the total profit

will be 37 per cent more than without the export order.


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A factory operating at 50 per cent capacity believed it was

exporting garments at a loss in spite of a government

incentive payment of 15 per cent of f.o.b. price. It was,

therefore, making no effort to maintain its export sales.

Expert advice on the use of marginal costing convinced the

factory management that it was in fact not losing on exports

and it could quote even lower prices if necessary.


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MATERIALS

WAGES

SOCIAL INSURANCEADMINISTRATIVE OVERHEADS

FINANCIAL CHARGES

DEPRECIATION

ROYALTIES

DIRECT TAXES

PACKING

SELLING COSTS

COMMISSION

TOTAL COSTS

ACCEPTABLE F.O.B. PRICE

ADD 15% GOVT. INCENTIVE

51.54

45.22

19.8040.00

8.79

13.64

10.22

0.96

5.11

2.50

17.04

214.82 A

170.45

25.50

195.95 B

51.54

45.22

19.80-

-

7.64(Addl.wear of equipment)

10.22

0.96

5.11

2.50

17.04

160.03 (Marginal Cost) C

170.45

25.50

195.50 B

B minus A, loss 18.87 35.92 (B minus C, profit)

(Fixed costs covered in domestic

prices)

Factory Cost Per Unit (In Rs) Using Marginal Costing


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COMPONENTS OF

EXPORT PRICE STRUCTURE

1. FACTORY COST OF PRODUCT

RAW MATERIAL

LABOUR

OTHER DIRECT EXPENSES

FACTORY OVERHEAD

2. PRODUCERS PROFIT

EX-WORKS PRICE (1+2)


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3. EXPORT PACKING & DISTRIBUTION

4. PROCESSING & HANDLING EXPENSES

5. LOADING AT FACTORY

6. TRAMSPORT TO DOCKS, RAIL HEAD OR AIRPORT

7. PORT/RAIL/AIRPORT HANDLING CHARGES

8. CHARGES ON ACCOUNT OF INSURANCE PREMIUM

9. COST OF EXPORT DOCUMENTS (B/L, AIRWAY BILL)

10. CONSULAR INVOICE, CERTIFICATE OF ORIGIN


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11. EXPORT DUTY, IF ANY

12. PAYMENT OF QUOTA PREMIUM, IF ANY

13. COMMISION TO AGENT ABROAD

14. BANK CHARGES (e.g. INTEREST ON TERMS OF

SALE)15. CLEARING AND FORWARDING AGENTS

CHARGES

DEDUCT DBK/INCENTIVE, IF ANY

F.O.B. EXPORT PRICE BEFORE PROFIT (1 TO

15)

ADD PROFIT (10%) = FOB EXPORT PRICE

AFTER PROFIT


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16. SEA/AIR FREIGHT CHARGES

CFR EXPORT PRICE (1 TO 16)

17. INSURANCE PREMIUM ON CARGO (MARINE

INSURANCE)

CIF EXPORT PRICE (1 TO 17)

18. IMPORT DUTIES AND TAXES

19. CLEARING AGENTS FEES IN IMPORTERS

COUNTRY

20. DEMURRAGE AT THE DOCK/AIRPORT, IF ANY

21. UNLOADING CHARGES AT PORT OF

DESTINATION


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22. PORT/AIRPORT HANDLING CHARGES &FEES AT THE PORT OF DESTINATION

LANDED COST (1 TO 22)

23. TRANSPORT FROM DOCK/AIRPORT TOIMPORTERS WAREHOUSE

24. IMPORTERS MARGIN OR MARK-UP

25. WHOLESALERS MARK-UP

26. RETAILERS MARGIN OR MARK-UP

PRICE TO THE CONSUMER (1 TO 26)

Documents

Export Price