INTERNATIONAL BUSINESS

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INTERNATIONAL BUSINESS

• LECTURE 9
• International pricing decisions and calculations,
  VAT
• Gregor Pfajfar, MSc
• Faculty of Economics University of Ljubljana
• E-mail gregor.pfajfar_at_ef.uni-lj.si
• January 6th 2010

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Time table

• Setting the prices
• The importance of pricing decisions in
  International Business
• Setting the prices in theory and in practice
• Price characteristics and components
• Price calculations
• Purpose
• Types
• Examples and procedures

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Why are price calculations important?
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Price calculations in international business

• Price as invoiced vs. purchase price (discounts)
  vs. net purchase (cost) price
• Costs (transport, insurance, uploading,
  unloading, )
• Tariff
• Taxation base
• Mark-up / profit margin
• Final selling price do we really know, how high
  are the costs that cover the transfer of products
  to importers land, and can we add all profit
  margins and account for VAT and sell products
  priced like that (are we competitive)?

Purchasing perspective
Competitiveness? Profit?
landed cost
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Setting the prices in theory and in practice

• The importance of a factor called price price
  and non-price based competition
• Setting the prices in theory depends on the
  amount of supply (S) and amount of demand (D)
  evaluation of factors, that affect S and D
• The approaches of setting prices in practise
• cost based price setting
• order based price setting
• demand based price setting
• competition based price setting
• Closed contractual agreements (tenders)

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What are price characteristics and components?

• Currency in the currency of the importer,
  exporter or a stable currency of a third country
  or a currency that is set for certain type of
  goods with regulations and business habits
• Financing period payment deadline can be before
  actual delivery, at delivery or after delivery
• Payment instrument prepayment, letter of credit,
  factoring, etc.
• Discounts
• Prepayment discount
• Quantity discount
• Preorder discount
• Sample discount
• Discount for after sales service
• Promotional discount
• Unit of measurement
• International commercial terms (Incoterms)

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Purpose and types of price calculations

• Purpose planning and controlling the costs,
  business processes analysis, directing business
  politics of the company
• Types
• As regards the form of international business
  (import, export, compensation, re-export, etc.)
• As regards the computation technique
  (progressive, retrograde, differential).
• As regards the phase of business (preliminary,
  final account)

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Example 1 progressive calculation

• Slovenian company Dežnik ltd. has imported from
  China garden umbrellas for 50,000 EUR (10 EUR per
  piece), price as invoiced. The Chinese supplier
  has offered importer a 3 prepayment discount and
  5 quantity discount that are both calculated
  from the initial price as invoiced. The purchase
  price was agreed under the EXW (producers
  factory) terms. When importing garden umbrellas
  from China, the importer has to pay 4.7 of
  tariffs. Cost of transport and insurance account
  for 2,000 EUR, while 95 of this cost represents
  transport from the supplier to Luka Koper
  (Slovenian border) and 5 the transport from Luka
  Koper to Ljubljana, where is also the warehouse
  of the importer. The importer hired also the
  forwarding agent, which costs represent 2 of
  customs value of the goods. The tax rate is 20.
• What is the value of customs duties, that the
  importer needs to pay?
• What is the selling price of the goods that
  importer will sell to wholesale merchant, if the
  wholesale profit margin is 25?
• What is the retail selling price, if the retail
  profit margin is 35?
• How much VAT will the wholesaler and retailer
  need to pay/get back at the end of the month
  (hint the difference between entry and exit
  VAT)?

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Example 2 retrograde calculation
Slovenian retailer with sport equipment Šport
ltd. has received from the Russian producer a
sample of sport shoes (sneakers) with a special
technology that absorbs the strokes. Company
Šport ltd. has made a market research and found
out targeted consumers would on average be
prepared to pay 110 EUR for a pair of those
shoes. Furthermore, the company also assessed the
demand, which account approximately for 6,000
pieces of shoes. The negotiations regarding the
purchase price followed. Company Šport ltd. has
prepared very well for the negotiations. They
found out that the tariff rate for importing such
sport shoes from third countries would be 17,
the cost of transport and insurance for 6,000
pairs of shoes are 5,000 EUR (where 95 of this
cost originates from the transport and insurance
from the supplier to Slovenian border, the rest
5 are accounted on the track from entry into the
customs zone to the warehouse of the buyer),
costs of forwarding agent are 600 EUR, costs of
uploading the goods account for 80 EUR for the
whole shipment, while costs of unloading the
goods are 100 EUR. Calculate the highest
possible price in EUR, which the Slovenian
retailer is prepared to pay, under the condition
that his/her profit margin is 40 and the agreed
price is under terms FCA (Moscow, producers
warehouse).
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Example 3 Customs duties

• Hungarian company Reactor ltd. is exporting
  hydraulic turbines in USA at the purchase price
  of 120,000 USD per piece, under the terms FAS
  (Hamburg), INCOTERMS 2000. The cost of road
  transport to Hamburg are 1,000 USD per a truck,
  which can transport two turbines simultaneously.
  The costs of transatlantic shipment from Hamburg
  to Charleston are 10,000 USD for both turbines,
  while the cost of road transport from the port in
  Charleston to the buyer in Atlanta are 500 USD.
  The cost of forwarding agent is 600 USD. The
  tariff rate is 6.7, the tax rate in USA is 20.
• Assuming that the American buyer ordered two
  turbines, calculate customs duties that the buyer
  will need to pay.

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Example 4 Chosing the best offer

• Slovenian producer of juices Fructal ltd. was
  buying fruits in Argentina, however after the
  entry of Slovenia into European union in 2004,
  he/she wanted to evaluate also the offer of
  Italian producer from Sicily. Argentinean
  supplier offers 1 kg of high quality peaches for
  4 EUR price as invoiced under the terms FOB
  (Buenos Aires), while the Italian supplier offers
  the same quantity of high quality peaches for 7
  EUR price as invoiced under the terms CIF (Luka
  Koper). If buying 5 tons of peaches the
  Argentinean producer offered 5 quantity
  discount, while Italian producer 7 quantity
  discount. When importing peaches from Argentina
  the 16 tariff rate needs to be taken into
  consideration. Cost of transport and shipment
  insurance from Argentina are 2 EUR (for a kg of
  peaches), from which 0.1 represents the costs
  from Slovenian border to companys warehouse.
  Costs of uploading the ship in Argentina are 0.1
  EUR, costs of unloading the ship in Luka Koper
  are 0.12 EUR (hint the customs procedure is done
  after unloading the goods). Cost of transport
  from Italy represent 5 of purchase price, from
  which 90 of costs originate on the track to Luka
  Koper, while the rest from Luka Koper to the
  companys warehouse in Ajdovšcina. The insurance
  costs in this case are 100 EUR for the whole
  shipment. In both cases, Slovenian importer uses
  the service of forwarding agent, which costs are
  2 of customs value in case of importing from
  Argentina, and 0.1 EUR/kg in case of importing
  from Italy.
• Which supplier of peaches the Slovenian producer
  of juices will choose?