Quoting a First Export Order: Incoterms, Currency, and a Tempting Second Buyer
Riverton Toolworks, a 22-employee maker of precision hand tools in Ohio, has its first export inquiry: a German distributor wants 1,200 units at €38 each, CIF Hamburg, payment 60 days after shipment. Unit cost is $29; the current rate is $1.09 per euro and the company's bank projects a $1.05–$1.14 range over the next 90 days. Ocean freight and insurance to Hamburg total $2,600; inland freight to the US port is $400 whether the quote is FOB or CIF. The plant can produce 1,500 units a month; domestic orders, which earn a 32% contribution margin, already fill about 1,100 units a month. A Brazilian buyer has also asked for 3,000 units by Q4 but wants 120-day open-account terms; the company has no export credit history and has never run a credit check on a foreign buyer. The owner, who has never sold outside the US, asks for a recommendation on both inquiries.
1. Compute the contribution margin of the German order at the current exchange rate under both FOB and CIF terms, and again at the bank's low rate of $1.05. What CIF price per unit in euros preserves the same dollar contribution as an FOB quote at €38? Recommend which terms to quote, and identify the Incoterms point the owner is most likely to misunderstand.
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Revenue and cost at the spot rate
- 1,200 × €38 = €45,600. At $1.09/€ that is $49,704.
- Product cost: 1,200 × $29 = $34,800. The $400 inland freight is incurred under either term.
Contribution
- FOB port: $49,704 − $34,800 − $400 = $14,504 (about 29% of revenue).
- CIF Hamburg: $49,704 − $34,800 − $400 − $2,600 = $11,904. Quoting CIF without repricing quietly gives away $2,600.
- At $1.05, revenue falls to $47,880: FOB $12,680, CIF $10,080. The order still covers product cost at the low end of the bank's range, so the currency risk is a margin problem rather than a survival problem - but $1,824 of swing is 3.7% of revenue, which is most of the order's profit.
Price that preserves the FOB result under CIF Target contribution $14,504 + total costs $37,800 = $52,304 needed revenue ÷ 1,200 units = $43.59 per unit ÷ 1.09 = about €40.00 CIF Hamburg.
Recommendation Quote CIF at €40.00 if the buyer will take it; otherwise quote FOB and let the distributor arrange freight. The trap the owner will fall into: under CIF the seller pays freight and insurance, but risk passes when the goods are on board at the origin port - not on delivery in Hamburg. The insurance protects the buyer, not the seller. Second trap: 60-day payment terms leave the euro receivable unhedged; either book a forward contract when the quote is accepted or price in US dollars.
2. Should Riverton accept the Brazilian order on 120-day open-account terms? Support the answer with capacity arithmetic, cash-cycle timing, and credit risk, and propose the counter-terms you would offer.
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Capacity is the binding constraint. Spare capacity is 1,500 − 1,100 = 400 units a month. The German order consumes 1,200 units in Q3, which absorbs roughly three months of that spare capacity. The Brazilian request of 3,000 units in Q4 compares with about 1,200 units of spare capacity in the quarter, so roughly 1,800 units would have to be pulled away from domestic orders. At a 32% contribution margin, displaced domestic business is expensive: unless the Brazilian price clears product cost plus the lost domestic contribution plus export freight, documentation, and insurance, the order shrinks profit even while it grows revenue.
Cash-cycle timing. Materials and labor of roughly 3,000 × $29 = $87,000 go out the door months before collection; with 120-day terms after shipment, the receivable is not cash for roughly five to six months. That is a very large, concentrated receivable for a company this size, owed by a buyer with no credit file and no prior relationship.
Credit risk. Open account means Riverton is lending to a stranger in a country whose import rules, currency controls, and dispute remedies it has never tested.
Counter-offer. Start with a 300–500 unit trial; require 30% advance by wire, balance against an irrevocable letter of credit at sight confirmed by a US bank, or buy export credit insurance and obtain a credit report through the bank; price in USD; ship in staggered lots; and verify the buyer's bank reference and import licensing. If the buyer refuses any risk-sharing instrument on a first order, decline.