Question

Minicase Tarus Manufacturing: V.3

John Baker, Vice President of Tarus Manufacturing, called in Ed Anderson, the export manager, to discuss the sales results for the new adhesive that Tarus was exporting to its sales subsidiary in Colombia.

Baker: Ed, How is Tarus Colombian doing with the new adhesive we're sending them?

Anderson: they're doing well. In the first six months, they've sold 12,000 quarts at 5400 pesos or $9 a quart.

Baker: Not bad for a small operation. If they keep it up, that cement is going to be a best-seller.

Anderson: That's true, and our profit is good. Moreover, I've been studying Columbia's import tariff and I think I've found a way to improve our profit.

Baker: Great. How are you going to do it? It has to be honest, Ed.

Anderson: Well, you know that they have to pay a 50 percent ad valorem import duty on our $4.80 invoice price plus 70 pesos per quart specific duty. If, however, we send them the adhesive in 55-gallon drums, the import duty drops to 20 percent ad valorem plus a specific duty of 6,000 pesos per drum.

Baker: Yes, but then they'll have to buy one-quart cans and labels and fill them in Colombia. This adds to their expense.

Anderson: True, but because we won't have to fill the cans or charge them for cans or labels, we will save 60 cents per quart, which we'll pass onto them.

Baker: How much will it cost to fill the cans locally?

Anderson: They tell me the cans, labels, and labor to fill the cans will come to 360 pesos per can, and the only investment required is a shutoff valve, which they screw in the drumhead when the cans are filled.

Baker: I'm not sure I see the advantage, Ed. The cans, labels, and the labor are more expensive in Colombia than they are here. Whats is the advantage?

Anderson: Let me show you, John.

Show Ed Anderson's calculations. Disregard any possible freight savings for shipping in bulk.

Use exchange rate____________?

______________________	Alternative A	Alternative B
Comparative Element of Costs	Imported Quarts $Cost/Quart	Imported 55 Gallon Drums $Cost/Quart
1.
2.
3.
4.
Total $Cost per Quart

Decision:

Answer 1

Exchange Rate: 1 USD = 600 Pesos (5400/9)

Price/ quart = $ 4.20/ Quart = ($ 4.80/ Quart - $ 0.60 savings)

	Alternative A	Alternative B
Comparative Element of Costs	Imported Quarts $Cost/Quart	Imported 55 Gallon Drums $Cost/Quart
Ad Valorem Duty	50% X $ 4.80 = $ 2.40	20% X $ 4.20 = $ 0.84
Specific Duty	70 pesos/600 = $ 0.12	(6000 pesos/600)/(55 gallon X 4 Quarts/ gallon) = $ 0.05
Cans & Labels	NIL	360 pesos/ 600 = $ 0.6
Cost	$ 4.80	$ 4.20
Total $ Cost per Quart	$ 7.32	$ 5.69

Hence, Alternative B should be chosen.