CIF = FAS + Freight + Export Insurance Crosswell International and Brazil' ($34.00 + $4.32 + $0.86) x R$2.50/$ = R$97.95. %3D Crosswell International is a U.S.-based manufacturer and The actual cost to the distributor in getting the diapers through the port and customs warehouses must also be calculated in terms of what Leonardo Sousa's costs are distributor of health care products, including children's diapers. Crosswell has been approached by Leonardo Sousa, the president of Material Hospitalar, a distributor of health care products throughout Brazil. Sousa is interested in distributing Crosswell's major diaper product, Precious Diapers, but only if an acceptable arrangement regarding pricing and payment terms can be reached. Exporting to Brazil Crosswell's manager for export operations, Geoff Mathieux, followed up the preliminary discussions by put- ting together an estimate of export costs and pricing for discussion purposes with Sousa. Crosswell needs to know all of the costs and pricing assumptions for the entire sup- ply and value chain as it reaches the consumer, Mathieux believes it critical that any arrangement that Crosswell enters into results in a price to consumers in the Brazilian marketplace that is both fair to all parties involved and competitive, given the market niche Crosswell hopes to penetrate. This first cut on pricing Precious Diapers into Brazil is presented in Exhibit A. Crosswell proposes to sell the basic diaper line to the Brazilian distributor for $34.00 per case, FAS (free along- side ship) Miami docks. This means that the seller, Cross- well, agrees to cover all costs associated with getting the diapers to the Miami docks. The costs of loading the dia- pers aboard ship, of the actual shipping (freight), and of the associated documents is $4.32 per case. The running subtotal, $38.32 per case, is termed CFR (cost and freight). Finally, the insurance expenses related to the potential loss of the goods while in transit to final port of destination, export insurance, are $0.86 per case. The total CIF (cost, insurance, and freight) is $39.18 per case, or 97.95 Brazil- ian real per case, assuming an exchange rate of 2.50 Bra- zilian real (R$) per U.S. dollar ($). In summary, the CIF cost of R$97.95 is the price charged by the exporter to the importer on arrival in Brazil, and is calculated as follows: in reality. The various fees and taxes detailed in Exhibit A raise the fully landed cost of the Precious Diapers to R$107.63 per case. The distributor would now bear storage and inventory costs totaling R$8.33 per case, which would bring the costs to R$115.96. The distributor then adds a margin for distribution services of 20% (R$23.19), raising the price as sold to the final retailer to R$139.15 per case. Finally, the retailer (a supermarket or other retailer of consumer health care products) would include its expenses, taxes, and markup to reach the final shelf price to the cus- tomer of R$245.48 per case. This final retail price estimate now allows both Crosswell and Material Hospitalar to eval- uate the price competitiveness of the Precious Ultra- Thin Diaper in the Brazilian marketplace, and provides a basis for further negotiations between the two parties. The Precious Ultra-Thin Diaper will be shipped via con- tainer. Each container will hold 968 cases of diapers. The costs and prices in Exhibit A are calculated on a per case basis, although some costs and fees are assessed by container. Mathieux provides the export price quotation shown in Exhibit A, an outline of a potential representation agree- ment (for Sousa to represent Crosswell's product lines in the Brazilian marketplace), and payment and credit terms to Leonardo Sousa. Crosswell's payment and credit terms are that Sousa either pay in full in cash in advance, or with a confirmed irrevocable documentary L/C with a time draft specifying a tenor of 60 days. Crosswell also requests from Sousa financial statements, banking references, foreign commercial references, descrip- tions of regional sales forces, and sales forecasts for the Pre- cious Diaper line. These last requests by Crosswell are very important for Crosswell to be able to assess Material Hos- pitalar's ability to be a dependable, creditworthy, and capa- ble long-term partner and representative of the firm in the The Precious Ultra-Thin Diaper will be shipped via container. Each container will hold 968 cases of diapers. The costs and prices below are calculated on a per case basis, although some costs and fees are assessed by container. Exports Costs and Pricing to Brazil Per Case Rates and Calculation FAS price per case, Miami $34.00 Freight, loading, and documentation 4.32 $4,180 per container/968 = $4.32 CFR price per case, Brazilian port (Santos) $38.32 Export insurance 0.86 2.25% of CIF CIF to Brazilian port $39.18 CIF to Brazilian port, in Brazilian real R$97 95 2.50 Real/US$ x $39 18 Brazilian Importation Costs Import duties 1.96 2.00% of CIF Merchant marine renovation fee 2.70 25,00% of freight Port storage fees 1.27 1.30% of CIF Port handling fees 0,01 R$12 per container Additional handling fees 0.26 20.00% of storage and handling Customs brokerage fees 1.96 2.00% of CIF Import license fee 0.05 R$50 per container Local transportation charges 1.47 1.50% of CIF Total cost to distributor in real R$107 63 Distributor's Costs and Pricing 1.47 1.50% of CIF x months Storage cost 6.86 7.00% of CIF x months Cost of financing diaper inventory Distributor's margin 23.19 20 00% of Price + storage + financing Price to retailer in real R$139.15 Brazilian Retailer Costs & Pricing 20.87 15.00% of price to retaller Industrial product tax (IPT) Mercantile circulation services tax (MCS) 28 80 18.00% of price + IPT 56.65 30.00% of price + PT + MCS Retaller costs and markup Price to consumer in real R$245 48 Diaper Prices to Consumers Diapers per Case Price per Diaper 352 R$ 0.70 Small size Medium size 256 R$0.96 192 RS 1.28 Large size diapers at $39.18 per case, CIF Brazil, payable in U.S. dollars. This is a total invoice amount of $379,262.40. Payment terms are that a confirmed L/C will be required of Material Hospita- lar on a U.S. bank. The payment will be based on a time draft of 60 days, presentation to the bank for acceptance with other documents on the date of shipment. Both the exporter and the exporter's bank will expect payment from the importer or importer's bank 60 days from this date of shipment. Brazilian marketplace. The discussions that follow focus on finding acceptable common ground between the two parties and working to increase the competitiveness of the Precious Diaper in the Brazilian marketplace. Crosswell's Proposal The proposed sale by Crosswell to Material Hospitalar, at least in the initial shipment, is for 10 containers of 968 cases of What Should Crosswell Expect? Assuming Material Hospitalar acquires the L/C and it is confirmed by Cross- well's bank in the United States, Crosswell will ship the goods after the initial agreement, say 15 days, as illustrated in Exhibit B. Simultaneous with the shipment, when Crosswell has lost physical control over the goods, Crosswell will present the bill of lading (acquired at the time of shipment) with the other needed documents to its bank requesting payment. Because the export is under a confirmed L/C, assuming all documents are in order, Crosswell's bank will give Crosswell two choices: L/C, it is protected against changes or deteriorations in Material Hospitalar's ability to pay on the future date. What Should Materlal Hospitalar Expect? Material Hospitalar will receive the goods on or before day 60. It will then move the goods through its distribution system to retailers. Depending on the payment terms between Material Hospitalar and its buyers (retailers), it could either receive cash or terms for payment for the goods. Because Material Hospitalar purchased the goods via the 60-day time draft and an L/C from its Brazilian bank, total payment of $379,262.40 is due on day 90 (shipment and presentation of documents was on day 30 + 60-day time draft) to the Brazilian bank. Material Hospitalar, because it is a Brazilian-based company and has agreed to make payment in U.S. dollars (foreign currency), carries the cur- rency risk of the transaction. 1. Wait the full time period of the time draft of 60 days and receive the entire payment in full ($379,262.40). 2. Receive the discounted value of this amount today. The discounted amount, assuming U.S. dollar inter- est rate of 6.00% per annum (1.00% per 60 days): Crosswell/Materlal Hospitalar's Concern The concern the two companies hold, however, is that the total price to the consumer in Brazil, R$245.48 per case, or R$0.70/diaper (small size), is too high. The major competi- tors in the Brazilian market for premium quality diapers, Kenko do Brasil (Japan), Johnson and Johnson (U.S.), and Procter and Gamble (U.S.), are cheaper (see Exhibit C). $379,262.40 $379,262.40 = $375,507.33 (1 + 0.01) 1.01 Because the invoice is denominated in U.S. dollars, Crosswell need not worry about currency value changes (currency risk). And because its bank has confirmed the EXHIBIT B Export Payment Terms on Crosswell's Export to Brazil Time (day count) and Events 10 15 30 60 90 Crosswell Crosswell's bank confirms L/C and notifies Crosswell Crosswell ships goods Goods arrive at Brazilian port agrees to ship under an L/C Material Hospitalar applies to its bank in Sao Paulo for an Period of outstanding account recewable (60-day time draft) L/C Brazilian bank approves L/C and issues in favor of Crosswell: L/C sent to Crosswell's bank Crosswell presents documents to its bank for acceptance and payment of $379,262 (today is "sight") Material Hospitalar makes payment to Its bank of $379,262 Crosswell's bank pays discounted value of acceptance of $375,507 EXHIBIT C Competitive Diaper Prices in the Brazilian Market (in Brazilian real) Price per Diaper by Size Company (Country) Brand Small Medium Large Kenko (Japan) Monica Plus 0.68 0.85 1.18 Procter and Gamble (USA) Pampers Uni 0.65 0.80 1.08 Johnson and Johnson (USA) Sempre Seca Plus 0.65 0.80 1.08 Crosswell (USA) Precious 0.70 0.96 1.40 Required: Briefly discuss how the various stages and their costs impact the ability of Crosswell, as an exporter, in being competitive on its product pricing while penetrating the Brazilian market.