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

TYPES OF PRICING
SKIMMING PRICING
MARKET ORIENTED PRICING MARKET PENETRATION PRICING PRESTIGE PRICING

COSTS

FIXED COST

LAND
PLANT AND MACHINERY RENT OF THE BUILDING

ADMINISTRATIVE COST
VARIABLE COST RAW MATERIAL LABOUR OTHER DIRECT EXPENSES

MARGINAL COSTING
IS THE VARIABLE COST INCURRED AS A RESULT OF UNDERTAKING A SPECIFIC ACTIVITY. IT IS THE AMOUNT 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 THE ENTERPRISE BREAKS EVEN.
BEP = FC/SR-VC

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.

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 additional shirt. It is calculated as follows:
IN Rs Direct Materials Direct Labour Other variable exp. Variable Cost Fixed Cost TOTAL COSTS COST PER UNIT COST OF 1000 UNITS 2,000 2,000 500 4,500 1,500 6,000 6.00 ADDL. COST OF 200 UNITS 400 400 100 900 900 4.50

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 of 1000 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 has received 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 the manufacturer take the order?

DOMESTIC SALES
9-MONTH PRODUCTION IN UNITS AVERAGE SELLING PRICE (Rs) SALES REVENUE (RS) 9,000 7.60 68,400

EXPORT SALES
3,600 6.00 21,600

TOTAL
12,600 90,000

VARIABLE COSTS (Rs)

FIXED COSTS (RS) PROFIT (Rs) PROFIT IN % OF SALES

40,500
13,500 14,400 21%

16,200
5,400 25%

56,700
13,500 19,800 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.

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.

Factory Cost Per Unit (In Rs)

MATERIALS WAGES SOCIAL INSURANCE ADMINISTRATIVE OVERHEADS FINANCIAL CHARGES DEPRECIATION ROYALTIES DIRECT TAXES PACKING SELLING COSTS COMMISSION TOTAL COSTS ACCEPTABLE F.O.B. PRICE ADD 15% GOVT. INCENTIVE B minus A, loss 51.54 45.22 19.80 40.00 8.79 13.64 10.22 0.96 5.11 2.50 17.04 214.82 A 170.45 25.50 195.95 B 18.87

Using Marginal Costing

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 35.92 (B minus C, profit) (Fixed costs covered in domestic prices)

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)

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

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 CHARGES AND FORWARDING AGENTS

DEDUCT DBK/INCENTIVE, IF ANY F.O.B. EXPORT PRICE BEFORE PROFIT (1 TO 15) ADD PROFIT (10%) = FOB EXPORT PRICE AFTER PROFIT

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 COUNTRY

AGENTS

FEES

IN

IMPORTERS

20. DEMURRAGE AT THE DOCK/AIRPORT, IF ANY 21. UNLOADING DESTINATION CHARGES AT PORT OF

22. PORT/AIRPORT HANDLING CHARGES & FEES AT THE PORT OF DESTINATION LANDED COST (1 TO 22) 23. TRANSPORT FROM DOCK/AIRPORT TO IMPORTERS WAREHOUSE 24. IMPORTERS MARGIN OR MARK-UP 25. WHOLESALERS MARK-UP 26. RETAILERS MARGIN OR MARK-UP

PRICE TO THE CONSUMER (1 TO 26)