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Dilip M. Sarwate
Professor Emeritus & Certified Management Consultant
What is price?
It is the amount a consumer is willing to pay for fulfilling needs & wants through acquiring products & services
Everything has a price
Price goes by many names Rent for an apartment, Tuition for education Fare for a train, Interest for a loan Tariff for MSEB, Fee for a lawyer Toll on highway, Wage for a worker Premium for insurance, Commission to a sales person Bribe by a government official, Salary for the executive Honorarium for faculty, Income tax for making money Dowry for marriage, Khandani for extortion Match fixing by a bookie, Donation to a politician Electing scoundrels is the price, we pay for democracy, Without it, life would be nice
Pricing will have to be worked out for,
a. Manufactured goods b. Traded goods c. Services d. Others like agriculture produce etc.
Sarwate 5 .COST ANALYSIS Dilip M.
Cost terminologies • • • • • • • • Prime cost: Material cost + labor cost + direct expenses Works cost: Prime cost + production overheads Cost of production: Works costs + admin overheads Cost of goods sold: Cost of production + selling & distribution costs Marginal cost: Variable cost Contribution: Sales – variable cost Profit: Contribution – fixed cost Sales – variable cost = Fixed cost + profit .
• Replacement costs: Investments in assets at old costs to be replaced at today’s or tomorrow’s price. Cost implications on account of changes in 4 P’s. Cannot be recovered if there are no results. .Cost terminologies (Cont. • Differential costs: Additional out of pocket costs on account of a result of specific decisions.) • Opportunity cost: Economic benefit obtained or lost by accepting one alternative over another. • Sunk cost: Economic resources already committed and spent.
costs till the final product is ready. on the basis of • Process costing: Different business processes and their .Cost terminologies (Cont. • Activity based costing: Costs allotted various activities performed.) • Batch costing: Different costs added for a certain batch of production.
Pricing for other than manufactured goods • Traded goods: Discount versus mark up • Services: Per hour basis. seniority basis and others • Agriculture produce: Supply & demand basis . percentage of cost of project basis.
packaging. interest on working capital. sundry expenses Dilip M. depreciation • Variable costs: (Those costs which are directly related to volume of production) Raw materials. utilities used in manufacturing. overhead costs. interest on term loan. Sarwate 10 . annual maintenance cost. electricity for admin office.DEFINITIONS • Fixed costs: (Those costs which are not related to volume of production) Salaries. wages. administrative cost.
FMCG. Sarwate 11 .Cost breakdown analysis (Engineering. Service Companies) Dilip M.
30 W&S 7-8 RM 25 .15 Service Organization 12 Engineering Company .30 Consumer Company Dilip M.15 Establishment 30 . Sarwate Mktg 10 .60 100 Mktg 25 .Cost breakdown as a percentage of Sale 100 Mktg 5-7 W&S 7-8 RM 50 .40 RM 10 .
Breakeven Analysis Definition .“No Profit No Loss Point” Dilip M. Typically. Sarwate 13 . this point is called .Breakeven point is a level of production volume or the capacity utilization where a company breaks even without getting any profit or incurring any loss.
Profit / Volume Ratio………… Profit means Contribution Volume means Sales Value 5.VC) 3. Breakeven Sales = (FC \ Sales) / (Sales . Profit = (P/V) \ Margin of Safety Dilip M. Breakeven Point = Fixed Cost / Contribution per Unit = Fixed Cost / (Selling Price Variable Cost PU) 2.1. Sarwate 14 . Margin of Safety = Present Sales Value Breakeven Sales Value 4.
Sensitivity analysis • Price • Fixed cost • Variable cost By making assumptions with respect to say realizing 10% less Price and/or increase in Fixed cost and Variable cost say by 10%. . what happens to Break Even Volume? The most sensitive is the one resulting in highest volume needed for break even.
territories. customers and so on .The power of analytics Developing winning strategies By Professor Davenport To identify the most profitable products.
credit and instalment) .Cost analysis • • • • • • • • • • By products Bu customers By territories By operating divisions By sales force By order size By channels of distribution By method of selling By mode of transportation By terms of sale (Advance.
Market skimming pricing c. Market penetration pricing b.Pricing Decisions Price setting in Theory a. Multi brand pricing d. Multi level pricing .
payment terms and seasonality • Sealed bid pricing .Pricing decisions Price setting in practice • Cost plus method • Target return • Competitive parity • Demand oriented wrt to product quality. quantity. customer.
International pricing .
Market Imperatives • Country/Region/Type of customer (AU/OEM/Jobber/Reseller/ Government) • Entry barriers • Custom duties • Volume • Payment terms • Competition (Local/overseas) • Seasonality • Any other .
electricity • Assistance in doing overseas market research • Any others .Export Incentives • Duty drawback(Excise/ Customs) • Import entitlement (Premium prevailing at the time on import license) • Tax advantage • Preferential allotment of raw materials.
Export objectives • • • • • • • Utilization of capacity Import entitlement Market penetration Quality improvement Employment generation Earning foreign exchange Ego building .
Inco Terms • • • • • • • Ex factory price FOR FAS FOB C&F CIF FRANCO .
Cost elements • • • • • • • • • • • • • • Cost of goods manufactured Inspection costs Inbound transportation Loading/unloading costs Port charges Transit insurance Risk insurance (ECGC) Banking charges Freight Demurrage Loading/unloading at port of destination Custom duties Landed cost Wastage costs .
CIF) and currency Mode of payment Transportation Insurance • Other terms & conditions (Inspection. warrantee. jurisdiction and others) .Proforma Invoice • • • • • • • • Name of the consignee Description and specification of goods Volume Delivery period Price (FOB. force majeure.
Transfer pricing This is the price charged by a MNC in a country. they artificially raise profit in low tax countries and reduce profit in high tax countries. The variables include: • • • • • • • • • • • Volume of business and over all profit expected Restrictions on repatriation Competition Differential in income tax rates Performance evaluation of foreign units Import restrictions and customs duties Restrictions on royalty Availability of local funds and cash flow to be maintained Fluctuating currency and rate of inflation Anti dumping laws Risk factors . To minimize group profit.
Complexity of International Finance • • • • • • • Accounting practices Forex fluctuations Tax laws Interest rates Inflation rates Working capital norms Liquidity .
Hence. .Complexity of International Finance (cont.) Exchange rates • Fixed • Floating • Current ( Mix of fixed and floating) Forex market: The banks. The RBI keeps a track of change staking place and decides the rates. Spot transactions: Actual physical exchange of currency takes place after the deal is done. Forward transaction: Payment received after some days. there are spot and forward rates. brokers and users are involved in this market. dealers.
Complexity of International Finance (cont.) Exchange rate quotation • Direct: Number of units of home currency that are paid for a single unit of foreign currency • Indirect: Number of unit of foreign currency one would pay for a unit of home currency • % Change = ( Beginning rate – Ending rate)x 100/(Ending rate) • % Change= (Ending rate – Beginning rate) x 100/ (Beginning rate) .
• Local liquidity needs • Organizational considerations . bank charges etc • Institutional barriers: Differing tax system. forex fluctuations • Economic exposure: Cash flow affected due to effects of exchange rate changes International cash management • Transaction cost: Commercial cost.Foreign exchange risks • Translation exposure: Affects financial statements • Transaction exposure: Due to time lag. exchange control etc.
future/options. Use of netting or matching Leading or lagging Sifting risk to customers/suppliers Invoices for purchases in domestic currency Invoice prices directly to exchange rates . currency swaps. 3. 5.Risk management techniques • Hedging: Delays • External: Adopting positions in financial markets like forward contract. 4. 2. government insurance schemes (ECGC) • Internal: Modifications to exposures within company like. 1.
MNC’s defer taxes by channeling income through such countries and creating paper subsidiaries. International taxation: Tax earned in home country on income earned on.Tax havens These are the countries who offer zero or low tax rates like Monaco. St. Kitts. • Dividends • Interest from foreign branch subsidiary • Double tax avoidance treaty . Isle of Man etc.
Entry barriers Tariff barriers • Customs duties • Any other Non-tariff barriers • • • • • Banned items Restricted quota Barter system Local procurement Investments in local country .
Understanding basic finance Balance sheet analysis .
PROFIT & LOSS STATEMENT Income • • From sales From other sources Expenses • • • • • • • • • • • • Raw materials and other consumables Wages & salaries Utilities Administrative & other overhead costs Maintenance Operating profit (EBIDT) Interest Cash profit Depreciation Book profit Income tax Net profit Dilip M. Sarwate 37 .
BALANCE SHEET Sources of funds • Equity • Loans • Reserves & surplus Application of funds • Fixed assets (Land. cash) Dilip M. sundry debtors. Building. sundry assets) • Current assets (Raw materials. GIP. finished goods. Sarwate 38 . Plant & machinery.
Efficient handling of stocks.Financial Strength.Servicing of debt & equity Dilip M.Availability of liquid resources to meet commitments Turnover .Operational profit. Sarwate 39 . profit before & after tax. debtors & creditors Profitability . Relative Stake of Shareholders Liquidity .Analysis of Financial Performance Stability . return on investments Coverage .
Sarwate 40 .Financial Ratios Dilip M.
Debt / Equity 2. Stock Turnover Ratio = Cost of Sales / Average Stock B. Liquidity Ratio A. Turnover Ratio/ A. Sarwate 41 . Stability Ratio A. Current Ratio = Current Assets / Current Liabilities B. Quick Ratio = (Current Assets – Inventory)/ Current Liabilities 3. Creditors Turnover Ratio = (Creditors x365) / Annual Credit Purchases Dilip M. Debtors Turnover Ratio = (Debtors x 365)/ Annual Credit Sales C. Fixed Assets / Net Worth B.1.
Interest Cover = PBIT / Interest charges Dilip M. Profitability Ratio. A.4. Sarwate 42 . Return on Total = (PAT) / Total Capital Employed 5. Profit before tax ratio = (PB / Sales) X 100 B. A. Coverage.
Sarwate 43 .APPLICATIONS OF RATIO ANALYSIS • • • • TREND ANALYSIS BUDGETING COMPARISON WITH MAJOR COMPETITORS COMPARISON WITH OTHER INDUSTRY PLAYERS Dilip M.
Case studies .
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