A careful working of costs is necessary for determining export prices. There may be a variety of costs peculiar to exports. They may require special packaging and handling. Credit and collection costs may also be higher. Cost may be involved in documentation peculiar to export transactions. On the other hand, some of the costs involved in domestic sales may not apply to export sales, for example, domestic promotion costs. There might be savings on larger shipment and through bulk handling. Larger production may also lead lower costs. Thus the actual costs and risk involved in each export transaction have to be carefully evaluated. Those costs which are directly incurred for export purposes are necessarily to be realized from the importer. But he should not be burdened with costs primarily incurred for the home market. The following chart gives the various elements of costs (1) for export price based on marginal costs and (2) for export price based on full costs:
Export price Based on Marginal Costs
Variable production overheads (for example special dies ad jigs)
Variable administrative overheads (for example, salary of export clerk)
Others costs directly related to exports:
Selling costs – advising support to importers abroad
Special packing, labeling etc
Commission to overseas agent
Export credit insurance
Export duties, if any
Warehousing at port, if required
Documentation and incidentals
Interest on funds involved/cost of deferred credit
Cost of after sales service including free parts supply
Pre shipment inspection and loss on rejects
Total direct Costs
Less: Duty drawback and benefits sale of import licenses of any
Direct cost net = f.o.b price at marginal cost
Freight (Volume or weight whichever is higher)
c.i.f price(based on marginal cost)
Export price based on full costs
Direct costs as in (1) above
Feed costs/common costs
Publicity and advertising (general)
f.o.b price (based on full cost)
Freight (volume or weight whichever is higher)
c.i.f price (based on full cost)
Part of the above cost sheet gives the lower limit for export pricing . As would be clear from the cost sheet all costs directly related to exports are taken into cannot for fixing the lower limit. If some incentives are allowed on the export of the product concerned, the lower limit would be further reduced by the amount of incentives.
In the case of export houses purchasing their supplies from supporting manufacturers, the cost price of suppliers obtained would constitute the lower limit.
Points to be covered in an Export price quotation
1. A precise description of the merchandise, packaging, quality and technical specification. (Illustrated product literature should accompany in case of plant and equipment and durable consumer goods ad sample on consumer goods)
2. Price including any rebates and discounts terms payments.
3. Price of delivery. If c.i.f price is quoted, breakdown of the same should be provided.
4. Minimum and the maximum quantities that could be supplied
5. The mode of shipment and the date delivery
6. The period for which the quotation is valid
It is always desirable to prepare a costing sheet for every transaction on the above basis. This will ensure that the exporter does not overlook any items of cost quoting his price. A costing sheet can be also kept as permanent record about each transaction which could be of help in making future quotations.