Calculation Of Exports Costs

In the era of global market economy and fierce competition, importance of accurate costing of product is of core importance. Export pricing is most important tool for promoting sales and contesting in international competition. Exporter has to compete with producers in other supplying countries and domestic producers. Cost, demand and competition are the three important factors that determine price. Costing of products depend from industry to industry. During the initial evaluation, establishing the cost of exporting within a limited price range may be sufficient to estimate the viability of a transaction. Exporters must determine the cost of exporting products as precisely as possible. They must consider actual costs to be included and add the profit margin.

Let us understand the process one needs to follow while quoting price to buyers.

· Receipt of order: After the receipt of the ‘Quotation’, if the prospective buyer finds the information suitable to him, he places the ‘Order/Indent’ for the import of goods.

· Local procurement : The exporting firm has to either procure ready-made goods from the market or procure raw materials and start producing the goods according to the specification of the importer.

· Processing Cost : Cost of processing of raw material to readymade goods.

· Packaging cost : Once goods are ready then they need to be packed into boxes for export. Export of goods require special packing, marking and labeling of products.

· Cost of transportation up to port : from place of procurement / production till the port

· Shipment time : The time taken for goods to reach from port of shipment to the Buyer’s port. It takes 30 – 60 days.

· Credit period : Time given by Exporter to the buyer, as buyer needs time to sell the products in their country .

The above is the process one needs to follow while costing a product. The time gap between buying locally in INR and realization of foreign currency poses risk. While costing, a cushion has to be kept for currency fluctuation. The risk increases if shipment gets delayed or the importer delays the payment or cancels the contract.

CASE STUDY

M/s Risa Exim is a Rice Exporter. He gets an order to Export 1000 tons of rice. He buys Rice from domestic producer at a cost of Rs. 83 per Kg. He spends 25 paise on processing and packaging of that rice . He further spends 50 paise on transportation & shipment. So the total cost for M/s Risa Exim from purchase till transportation is Rs. 83.75 per kg. He gives a credit period of 30 to 45 days to his buyer. He keeps a profit margin of 0.25 paise so Final price is Rs 84.00 for 1 KG Rice. The total time from costing to realization is normally 90 days.

In Current Scenario, the current market rate is 84.40 and the costing to M/s Risa Exim comes to Rs. 83.75 (Without any profit margins) . The Rice Exporter takes 1 Dollar = Rs 84.00 (40 paise less than current Rate) and will give a quoting price of $1 per kg . Company is expecting to receive its remittance in March 2025. For 1 ton, the price will be $1,000 and total cost of 1000 tons will be $1,000,000.

As we can see that here the Exporter has linked the Quotation price with the Current Rate (40 Paise less than current rate and 25 paise profit margin )

With the exact data in hand, the Exporter knows that upto 84.00 rate , he doest have to worry but below 84.00 he will start loosing his profit margins and below 83.75, the deal will start going into loss.

Ideal Situation is to protect the receivable by booking a forward contract of March 2025 at 84.40 plus the premium and concentrate on next order but if he wants to maximise his gains, we recommend the following strategy

1. Book 30% - 40% of exposure immediately that is Book USD 300,000 to 400,000  of Forward Contract

2. If dollar rupee rate goes up by 0.25 paise, book 10 to 20% more

3. If dollar rupee rate falls by 0.12 paise still book 10 to 20%

By this strategy he protects himself from any shocks. Most of the Exporters loose money because they do not have any strategy of Risk Management. Here M/s Risa Exim has a formulae to arrive at the cost as well as strategy to Manage Exports receivables