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INTERNATIONAL BUSINESS

INTERNATIONAL BUSINESS. LECTURE 7 : International pricing decisions and calculations, VAT Gregor Pfajfar, MSc Faculty of Economics University of Ljubljana E-mail: gregor.pfajfar @ef.uni-lj.si March 2011. Time table. Setting the prices :

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INTERNATIONAL BUSINESS

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  1. INTERNATIONAL BUSINESS LECTURE 7: International pricing decisions and calculations, VAT Gregor Pfajfar, MSc Faculty of Economics University of Ljubljana E-mail: gregor.pfajfar@ef.uni-lj.si March 2011

  2. 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

  3. Why are price calculations important?

  4. 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 importer’s land, and can we add all profit margins and account for VAT and sell products priced like that (are we competitive)? Competitiveness? Profit? Purchasing perspective “landed cost”

  5. 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)

  6. 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 2010)

  7. 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)

  8. 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 (producer’s 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)?

  9. 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, producer’s warehouse).

  10. 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 2010. 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.

  11. 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 company’s 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 company’s warehouse in Ajdovščina. 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?

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