240000 per month The investment in various fixed assets of the company is Rs 10

240000 per month the investment in various fixed

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of Rs. 2,40,000 per month. The investment in various fixed assets of the company is Rs. 10 lakhs The company can manage with average one month of finished goods stocks and has to on an average extend 15 days credit in the market. Let’s say the company plans to manufacture and sell 60000 units per month. What should be the price per piece that can offer the company a 12 percent return on investment. If we look at the cost and investment figures, we find that the price ‘P’ for the product should be such that 60000 pieces sold per month will cover all the cost and thereafter provide a 12 percent return on investment per annum, which in other order words mean a 1 percent return on investment per month. 84
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PRICING So 60000 P = 60000* Variable Cost per unit + Fixed overheads per month + 1 percent return on (12 percent p.a. = 1 percent p.m. Fixed capital + Working capital Fixed capital we can reckon the figure of Rs. 10 lacs. To calculate working capital we shall have to find out investments in stock and oustandings. The company holds on an average one month’s equivalent of finished goods stock. Stocks are valued at cost. If the variable cost of manufacture of soaps is Rs. 14.00 per unit and the fixed overheads are Rs. 240000 p.m. then the cost of goods sold per cake of soap is Rs. 14.00 + (Rs. 240000/60000 = Rs. 4 per unit) = Rs. 18.00 per cake of soap. So the value of stocks would be 60000 * 18 = Rs. 1080000.00. For calculating the amount of funds blocked in market outstandings, we will similarly take 15 days equivalent of monthly sales i.e. 60000/2 = 30000 at Price ‘P’ = 30000 P. This is because market outstandings are always valued at selling price. So the equation would now look like 60000 P = 60000 * 14 + 240000 + 0.01 (1000000 + 1080000 + 30000 P) = 840000 + 240000 + 20800 + 300 P = 1100800 + 300 P or (60000 – 300) P = 1100800 or 59700 P = 1100800 or P = Rs. 18.44 So a price of Rs. 18.44 per piece would enable the firm to earn a return of 12 percent p.a. on monthly sale of 60000 units under the above cost and investment situation. Now the firm may have to validate on the basis of market survey, whether the market would respond at price Rs. 18.44 per 85
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PRICING piece with a monthly demand of at best 60000 pcs. If not, then what may be the price, and rework at that level what may the return expected. 5. Pricing for Exports Markets Whenever pricing for exports, a firm has to factor in a few very critical issues: 1. The likely rate of exchange. 2. The incentives that are available for exports. 3. Any special expenses that have to incurred specifically for the export deal. Currently $ is exchanged for Rs. 48.00 Indian rupees. If Indian rupees becomes stronger vis-a-vis $. like some time back when $ = Rs. 42.00 the INR equivalent of $ earnings can deplete substantially. While our Indian currency becoming stronger than foreign currency bids well for the importers, who have to pay in foreign currency, it works the other way for exporters because the INR equivalent of their earnings in foreign exchange shrink.
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