the local price for their toothpaste (price to market) or raise prices to cover the increased costs Incident D: Latin America Oil Prices and maintain the same 33.3% gross margin (pass through)? Assume each percentage increase in price corresponds to an equal percentage decrease in volume. Which pricing strategy will yield the highest total gross margin (ARS)? The price of oil can fluctuate dramatically based on the economic principles of supply and demand. As new economic powers emerge, such as China and India, the demand for oil continues to increase. Add the recent political instability of major oil exporting nations in the Middle East, and it is no wonder that oil prices are volatile. As a manager it is important to understand that the unpredictable oil market can dramatically affect profit margins. Most companies, especially those extremely dependent on oil, hedge this risk by purchasing oil futures to lock in prices. This makes it easier to predict future cash flows and eliminates the risk of uncertainty in the oil markets. When oil prices increase, the cost of shipping and landing goods in foreign countries often increase as well. Allstar is selling toothpaste in Argentina that is sourced from your Peru plant. Due to a spike in crude oil prices and speculation of future increases, your shipping costs are expected to double next period (increase 100%). Consider a particular SKU you sell in Argentina, the Economy Medium Tube of Paste (EMTP). The EMTP currently has revenue per unit for Allstar of 46.35 ARS (this revenue per unit is the MSRP less allowance and average channel volume discount). Allstar currently sells 1,000,000 EMTP units per year in Argentina. Per unit production, shipping, and tariff costs from the Peru plant to Argentina are Previous Period Plant Location Peru COGS $ (Economy Medium Tube Paste) 0.410 Original Costs (S) Argentina Shipping 0.020 COGS+Shipping 0.430 Tariff % 20% Tariff S 0.086 Total Landed Cost $ (COGS+Shipping+Tariff) 0.516 Exchange rate 59.880 Total Landed Cost ARS 30.898 The exchange rate is 59.8802 Argentina Pesos (ARS) per USD. First, how will the change in shipping costs affect the total unit landed cost for this SKU? Second, how, if at all, should you change the SKU price in Argentina? Is it better for Allstar to maintain1 Latin America Oil Prices 2 3 Starting Mfg. Unit Price in ARS 46.35 4 Starting Landed Unit Cost - USD 0.516 5 Increased Landed Unit Cost - USD 6 Exchange Rate (ARS to USD) 59.880 7 Starting Landed Unit Cost - ARS 30.898 8 Increased Landed Unit Cost - ARS 9 Change in Cost - ARS 10 Starting Sales in Units 1,000,000 11 Price to Previous Market(i.e., Pass Through 12 Period Same price) (Raise Price) Selling Price= Cost/(1-Markup;) 13 Starting Mfg. Unit Price in ARS 46.35 46.35 14 New Price in ARS 46.35 15 Landed Cost 30.90 16 Unit Gross Margin 15.45 17 Gross Margin % of Sales 33.3% 18 % Change in Price 19 Volume 1,000,000 20 Total Gross Margin in ARS 15,451,817 21 22 Change in Unit Mfg. Price in ARS 23 Change in Unit Gross Margin in ARS 24 Change in Unit Sales 25 Change in Total Gross Margin in ARS
