Calculation of Imports Cost

Business in international markets is different from handling domestic business transactions at various levels. A company that intends to buy from a foreign supplier must ensure that the transaction is viable, profitable,he will be able to provide goods /services at a price and quality that are competitive.A ‘landed cost’ is the term used when referring to the final cost of products plus all associated shipping and logistic costs required to get the goods delivered to a final location. In global trade process there can be many additional charges, fees and currency conversions that buyers must be aware of so that the landed cost of the products can be calculated. Some of the import costs include

• The cost of the products
• Currency conversion costs
• International freight & logistics charges
• Import charges, port charges, customs clearance fees
• Import duties , taxes and local delivery.

When an Indian Importer asks for quotation from seller, he gets quotation in dollar term. He assumes a conversion rate which is normally more than the current rate. The process begins when he starts to place the order as per payment terms.

Payment terms

· Advance Payment in dollar: In this case an importer makes advance payment , so there is less risk involved in currency fluctuation.

· Payment on submission of shipping documents by supplier: In this case Importer makes payment at the time of shipment, when goods are loaded in the ship from exporter’s port , so there is less risk involved .

· Payment on arrival: Payment made by importer at the time of arrival, in this case risk involved is very less.

· Goods on credit:In this case Importer gives credit period of say 60-90days, currency fluctuation is very volatile that is why huge risk is involved.

Conclusion

In the first three cases there is no currency risk involved as the importer arrives at costing as soon as he makes payment. He adds his profit and sells locally.However in the fourth case there is currency fluctuation during the period between local sale in rupee term and import payment in dollar. There is risk if dollar rupee goes up then importer has to give more rupees against dollar.

M/s Bharat Steels gets a contract to supply steel in India. He has to import it from Japan. The cost of steel is $ 600 per ton. The current rate is 84.00 which is spot rate and future rate for 50 days is 84.45. He keeps a cushion of 30 paise for currency fluctuation and assumes 84.75 as his Landed cost. 

Landed cost in Rupee comes as Rs. 50,850 locally while the cost is Rs 50,670. He gets credit period from seller of 90 days and considering shipment time of 30-40 days, his currency risk is for 50 days as he sells steel immediately on landing but pays to supplier later.

An Ideal Strategy for M/s Bharat Steel is to book 100% imports as soon as he sells the product in Indian Markets therby locking his 0.30 paise profits. However if he decides to take a risk. we suggest the following strategy

1. Book 30 - 40% of Imports on Day 1

2. As Forward rate is on premium and every passing day means a saving provided the spot remains at same level, the company should monitor forward rate with the costing and book 10 to 20 % on a dip of 15 to 20 paise

3. In case the spot level starts going up they should not waith for things to go out of hand and book forward for every rise of 10 paise.