Since the costs are all incurred in INR excepting some portion that may have

Since the costs are all incurred in inr excepting

This preview shows page 86 - 89 out of 203 pages.

Since the costs are all incurred in INR, excepting some portion that may have been imported, the export pricing must factor in this situation. Export prices can be quoted as: CIF – Cost insurance freight (the price includes insurance and freight changes) C&F – Cost and freight (the price includes only cost and freight). FOB – free on board (the price includes cost plus all expenses upto the merchandise being put on board the vessel). FOR – free on rail (it is the price quoted inclusive of all costs upto and at the location where it is being offered FOR). The implication of such different prices are that the additional costs specifically associated with the basis of quote, would have an impact on the profitability. 86
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PRICING Let us take an example to understand the entire working better: ABC Co. manufactures and sells industrial fasteners in the domestic market. There are 3 products M3, N2 and O5. The factory has equipments that can manufacture all the three items. All the items utilise equal amount of equipment time in production. Currently the Co. manufactures and sells per month M3, 17 lacs units, N2, 13 lacs units, O5, 14 lacs units The cost of production (cop) at this level of manufacturing are: M3, Rs. 6 per unit, N2, Rs. 7 per unit, O5, Rs. 4 per unit. (cost of production includes variable costs and equipment utilization charges on the basis of apportionment of the equipment standing/running charges to the total units produced) The standing charges on the equipments including running expenses at the current level of production are Rs. 55 lacs per month. (cost of production has been calculated at this level of standing charges). These will become Rs. 66 lacs if production is increased beyond the current level, till 150 percent of current levels, and if doubled, the standing charges are likely to be Rs. 71.5 lacs. Other fixed factory overheads are Rs. 240 lacs per annum. The Company observes a works transfer pricing system, under which the WTPs are: M3 Rs. 7 per unit, N2 Rs. 8 per unit, O5 Rs. 5 per unit. The Company’s selling prices (net realization) are M3 Rs. 12 lacs per unit, N2 Rs. 14 per unit, O5 Rs. 11 per unit. 87
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PRICING The selling and distribution overheads are Rs. 300 lacs per annum, fixed, and 2percent of selling price, variable. The domestic market for industrial fasteners is becoming very competitive, and in future the selling prices may have to be reduced. The Co. is negotiating an export order for 22 lacs pieces of N2 at a best possible price of 15 cents per piece c and f. Freight component will be 1.1 cents per piece and forwarding/handling costs upto on board the ship will be Rs. 0.80. (Exchange rate can be reckoned @ 1 US $ = Rs. 48.00). Export incentives will be @ 5 percent of sales price less freight component (i.e., c and f less f). Market information reveals that the party may place orders on a continuous basis and may also take upto 44 lacs per month if satisfied.
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