Case Study:
M/S Vivek International, Sheikh Sarai, New Delhi is engaged in the exports of gents shirts made of 100 per cent cotton fabrics. The details of the production capacity and other aspects are given below:
- Product: Gents Shirts
- Production Capacity installed: 4000 Shirts per month
- Present capacity utilization: 2000 Shirts per month
- Break-even level: 1400 Shirts per month
- Fixed Costs: INR. 140,000/- per month
- Variable Cost per shirt: INR 400 (or USD 10)
- Selling Price / FOB Ex- New Delhi INR 500 (or USD 12.5)
- (This is based on average rate of exchange of 1 USD = INR 40)
- Duty drawback rate; 15% of FOB Value (Assumed for easy calculations)
M/S Vivek International has received an enquiry for the supply of 1600 Shirts per month for the next one year to an importer in New York, U.S.A. But the initial talks with the importer have revealed that he would not be willing to pay USD 12.5 per shirt. He is quite inclined to pay much lower price. Since, this order would help increase capacity utilization, the economies of scale would reduce the variable cost in rupee terms by 10%. M/S Vivek International has decided to take this order.
You are requested to prepare a decision analysis to suggest the range of FOB prices (the minimum and the maximum) for negotiation of price with the importer. It may also be noted that the INR may weaken to a level of USD = INR 46 over the period of supply.
Provide complete and step by step solution for the question and show calculations and use formulas.