55 lacs machine standing charges at a production level of 44 lacs pieces per

55 lacs machine standing charges at a production

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against Rs. 55 lacs machine standing charges at a production level of 44 lacs pieces per month, meaning a per unit machine cost of Rs. 1.25, the rate comes down to Rs. 1.00 per unit at total machine standing charges of Rs. 66 lacs for a production of 66 lac units, which can further drop to Rs. 0.81 paise per unit at total machine standing charges of Rs. 71.5 lacs for a production of 88 lacs units, and this will become a possibility only if more export orders are received. Post weighing the above factors one may take a view that on the whole it may be worthwhile to accept the export order. However one point should be always borne in mind and that is no order can be accepted if the bare variable cost of production is not being covered, because in that case the more one sells the more one will end up losing. 4. Pricing Products having Service and Warranty Components When the product being priced has an element of warranty attached, involving replacement of parts and components, the manufacturer will have to estimate failure rate of such parts and components over the period for which the warranty is being extended, and cover the cost in the pricing. Thus in the case of a room airconditioner, the manufacturer may have to estimate the likely failure rate of compressors, fans, relays, etc. which would have to be replaced during the warranty period, in case of their failure, and add the cost of the same onto the manufacturing cost to arrive at the final cost of sales. 92
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PRICING The same process will apply in case of pricing for annual maintenance contracts, where the estimation of failures will require closer accuracy, since the failure rate of older equipments are likely to go up with age. 5. Pricing for Projects where the Same is Spread Over Time Whenever projects may have a time spread during which the funds may be flowing in and out at different points, a profitability calculation requires compounding and discounting the inflows and outflows, so that the net present values of the profits or otherwise are estimated correctly. Best is to understand with an example: A company is bidding for an airconditioning project which will be undertaken over a period of 4 years. The estimated cost of the project is pegged at Rs. 150 Crore while the price quoted is Rs. 200 Crores. However the cost is not to be incurred at one go, and similarly the revenues are not going to come in at one shot. The spread is estimated to be as under: All figures in Rs. crores Table no: 5.8 At the end of the period the net effect is + Rs. 50 crores. Let us presume the company works on a internal rate of return of 12 percent per annum, ie. it expects a return of 12 percent on its investments. Yr –> 2008 2009 2010 2011 2012 start end start end start end start end start end cost 20 25 50 25 30 revenue 10 40 50 50 50 net -10 -25 -50 -40 -25 +50 -30 +50 +50 93
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PRICING The calculation of the present value of all the inflows and outflows at the different points in time can be reckoned by discounting all the future inflows and outflows at 12 percent per annum.
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