Introduction
Cost, Insurance and Freight (CIF) is the price invoiced by a seller including the insurance of cargo, and all other charges incurred up to the destination port. During shipping of goods, there are challenges incurred when preparing the CIF quote. The main challenge is to ensure that all the necessary costs are included. Many of the cost items are readily available to the seller while the transporter prepares the others. Therefore, a description of the goods and their specifications must be accurate during the preparation of the CIF (Billings, 2003). All measures taken must be in standard form.
Jim Mason could not lower the FOB since it must be included when calculating the CIF. Failure to include this would have caused inaccuracy in the final statement of the whole transaction. He needed to include the cost of transportation of cargo from the warehouses to the port for shipment. Transport costs are a monetary measure of what the seller must pay the goods during transportation. Various factors affect the calculation of transportation cost. They include government barriers, energy consumed, and how the cargo is carried. Production cost and the company’s profits need to be included in the FOB (Sheares, 2008). The production cost includes the explicit and implicit costs. Explicit costs are payments made explicitly to the company employees, purchase of raw materials, and fees paid to the company lawyers. Implicit costs are the costs incurred in the process of using the company’s resources. For example, the company has its premises that it uses for production. A company keeping account of its production costs knows the expenses associated with production line and the entire cost of producing the item. Therefore, the manager needed not to lower the actual figure of the FOB.
Could he deduct sales expenses on a foreign order?
The sales expenses had to be included in the quotation. These expenses account for a big percentage of the selling price of the goods; hence, they needed to be included. They include the expense such as acquiring of auxiliary facilities for running the business, commissions paid to the contractors, purchase and maintenance of data processing facilities, taxes and hardware among others. These account majorly for the final cost of goods. The price of goods may vary because of the differences of sales expenses incurred by the selling company (Park, 2004).
Promotions and advertisement
The cost of advertising and promotion had to be included too. It can consume a large percentage of the business’ budget and is, therefore, of much importance. It is a component of the FOB. However, instead of looking at it as an expense, it should be perceived as an investment cost that has expected returns in future unless it will her have no impact on the sales made. There are several ways of determining the cost of advertising in a business. Advertising money is generated from the revenues acquired after selling the goods. Thus, the manager needed first to estimate the value of the sales intended to make. One of the ways is to allocate an item of known cost, an amount of money for advertising, per its sale (Varma, 2011). Therefore, advertising need not be ignored as it always has an impact on the consumer’s behaviour and the outcome selling. Advertising connects the goods and the demand. In the exportation process, advertising would influence the buyer’s perception of the goods (Varma, 2011). Good advertising would encourage the buyer to be interested in the goods the State Manufacturing Company had.
Should research and development be charged?
The manager needed to include the cost incurred in product research and development. Also, the management had to look at the situation from certain perspectives, the amount of money used in developing the product, and the effect of time on the value of the product during development to know the real cost of development. Therefore, the process of product development consumes both time and money that must be accounted for during the sale of the product. There are three phases of development of the product, all of which need money and time for completion. Companies tend to overlook the cost of efforts incurred in development because their systems do not check the amount of effort employed. The people who engage in development, range from the managers, marketing team, technicians among others. Time component in development and research is particularly crucial and emanates from all the three phases. Among the points, at which time is spent are; the managers’ assessment of the project, marketers doing the marketing, prototypes and pilot runs (Reynolds, 2009).
The money element is spent in various instances that include travels, visiting consultants, sampling and pilot running. A business that accounts for this expense perform much better than those businesses that do not. One of the instances the time element is consumed is during the processing of the product. It is a key factor affecting the internal rate of return on the product development investment. “Time to market” is the time taken to complete the product development. The internal rate of return of the product performs better with the decrease in “time to market” (Billings, 2003). Therefore, the charge for research and development had to be included, for the company, to have a realistic CIF.
In order to make a CIF quotation to the port in Italy, the manager needs first to calculate Cost and Freight and then add the insurance. To do it, we need to consider the factors that the freight forwarder can assist. The freight forwarder may request the chargeable weight in order to make the calculations right. The weight to be considered is the actual weight rather that the dimensional weight. The costs to be incurred include the transportation of the cargo, terminal delivery charges, ocean freight, documentation and forwarding fee. The insurance is necessary in case of loss or damage of the cargo during transit. It is calculated on a shipment-by-shipment basis. The freight forwarder can provide it, by basing the cargo insurance on the total value of the whole shipment. Freight, insurance and the unforeseen increase in cost during transportation are included (Billings, 2003).
Conclusion
CIF means that the seller must take care of all costs incurred from production of the goods up to the arrival of the cargo at the destination port. There are many expense included in the whole process and all amount to the CIF. Calculation of CIF is an activity that may prove problematic if not conducted carefully. The manager needs to be careful when selecting what to include and not to in the calculations. He also has to know where to extract the information for the activity; because there are individuals, who are outsiders to the company and play a crucial role, such as, freight forwarder. He should know that he is wholly responsible for the expenses until the buyer acquires the goods.
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