In calculating the retail price in the Australian market, we will consider the costs incurred in the purchase of the commodity in Polyprin’s domestic market (USA) and the mark-up for the Polyprin. The average domestic prices for imported products are estimated to be $A30-35. Based on an exchange rate of $A1.04 = $US1, this means that the price in U.S. dollars will be $U.S.28.85-33.65. If we assume that PolyPrin receives the lowest price of $US28.85, we can calculate the possible retail price in the Australian market.
First, we include all the costs incurred by PolyPrin as follows:
If the price received is $28.85 in Australia, we have to add shipping costs from the U.S to Australia. The price of shipping one dress is $5 which makes the total amount $33.85. On this price, we need to add a mark-up of 10% for PolyPrin which makes the total amount 1.1 *$33.85 = $37.24. However, there is a duty fee of 5% which is applied on retailer’s price. This makes the amount $37.24 * 1.05 = $39.10. The retailer’s mark-up is 20-25%. In this case we take the lowest mark-up of 20%. Thus the final lowest retail price for the dress will be $39.10 * 1.2 = $46.92. This is the lowest price possible. However, Polyprin may also use the highest price of $A 35 or $US 33.65. We add shipping cost of $5 per dress we get $38.65. Plus PolyPrin’s mark-up of 10% we have $38.65 * 1.1 = $42.52. A duty fee of 5% is applied thus we have $42.52 * 1.05 = $44.65. If the retailer’s mark-up is 25%, we have a retail price of $44.65 * 1.25 = $55.81. This is the highest retail price possible. Thus the retail price is between $46.92 and $55.81.
Calculating production cost per item
Variable costs (labor + materials + energy) = $40 million
Plant Overhead = $3 million
Total production cost = $43 million
Total units produced and sold = 3 million
Cost per unit = 43/3 =$14.33
Shipping cost per dress = $5. Total = $17.33
Mark-up for PolyPrin = 1.1 * $17.33 = $19.06
Add duty fee we have 1.05 * $19.06 = $20.01
Plus retailer’s mark-up of 1.2 * $20.01 = $24.01 or 1.25 * $20.01 = $25.01
The domestic pricing is better for PolyPrin as it fetches more revenue. From the analysis of the two pricing scenarios, it is evident that the company stands to make immense sales revenue by adopting domestic pricing. In this case, it is not just enough to consider the cost of producing one item and use that to determine the price of the item. It is also clear that PolyPrin has been making good sales over the past 5 years; however, exporting to the Australian market will be a major opportunity for the company to increase the current sales revenue and hence annual profits. Furthermore, it is prudent that PolyPrin considers the stage it is in life. Clearly, the company has not reached the maturity level required. Therefore, it is can take advantage of the opportunity provided by exporting to the Australian market and making major profits.
According to assessment done by the company, it is evident that it has dresses of higher quality material. It is also evident that PolyPrin’s dresses have unique in-house custom designs. These attributes of PolyPrin’s products are important in competing effectively within the Australian market. Therefore, the dresses are likely to be bought at the prevailing domestic market price as it will be the most beneficial to the company. By using the domestic pricing, the company will not be accused of dumping. It will also be acting on the bases of domestic market trends. For instance, cost pricing could lead to very low prices hence causing unhealthy competition in the domestic. This could lead to government intervention to protect the domestic market. Therefore, the lower of the domestic price should be applied.
Ultimately, the most appropriate price would be the cost pricing. Nevertheless, applying cost pricing in the Australian market eventually would require an establishment of a wholly owned subsidiary in the long. From the analysis of the market, it is evident that massive profits will be obtained by PolyPrin by exporting based on domestic price. It would be prudent to continue using the domestic pricing in the short-run so as to understand the market further. Similarly, the use of the domestic pricing is an opportunity for the company to make enough profits from the Australian market to raise the required $30 million for setting up a wholly owned subsidiary. The main advantage of such a move is that the company will greatly reduce the risks of financing its operations. The finance needed for the subsidiary would be obtained from the Australian market. Before a wholly owned subsidiary is set up, the company can participate in direct and indirect exporting, licensing and franchising, joint ventures. These methods could eventually raise enough profit for setting a wholly owned subsidiary.