Pricing a USD 6.50 FOB Enquiry with a 15-Day Fabric Quote
A first-time exporter in Ludhiana receives an FOB enquiry from a German buyer for 2,000 women's cotton blouses at USD 6.50 per piece, delivery in 60 days, payment 30 days after shipment. The costing sheet shows fabric consumption of 1.60 m per piece at 180 rupees per metre, trims at 35 rupees, and conversion (cutting, sewing, finishing and packing) at 75 rupees. The unit expects 3% seconds/rejection, factory overheads of 12% on prime cost and a profit margin of 8%. Three fit samples and a photo shoot cost 18,000 rupees, and the bank charges 1.5% on the invoice value. The exchange rate is 83 rupees per US dollar. The fabric supplier's quote is valid for only 15 days and the buyer refuses any price escalation clause. The owner wants to know whether to sign, and what a 10% rise in fabric price would do to the margin.
1. Build the cost sheet and calculate the cost per piece, the net realisation at USD 6.50 and the margin.
Read the worked answer
Cost build-up per piece (rupees):
| Element | Calculation | Amount |
|---|---|---|
| Fabric | 1.60 m x 180 | 288.00 |
| Trims | given | 35.00 |
| Conversion | given | 75.00 |
| Prime cost | 288 + 35 + 75 | 398.00 |
| Rejection 3% | 398 / 0.97 (dividing, not multiplying, is correct - you must produce 100 good pieces from 97 attempts) | 410.31 |
| Factory overhead 12% | 410.31 x 1.12 | 459.55 |
| Profit 8% | 459.55 x 1.08 | 496.31 |
| Sample amortisation | 18,000 / 2,000 | 9.00 |
| Cost per piece | 505.31 |
Realisation: FOB value per piece = 6.50 x 83 = 539.50 rupees. Bank charges 1.5% = 8.09. Net realisation = 531.41 rupees.
Margin: 531.41 - 505.31 = 26.10 rupees per piece, about 4.9% of net realisation, or 52,200 rupees on the order.
Conclusion: the order is technically profitable but thin - roughly half the 8% the sheet assumes, because sample cost and bank charges were left out of the sheet. That is the number to show the owner, not the 8%.
2. Sensitivity-check the fabric price rise and recommend terms for acceptance or rejection.
Read the worked answer
10% fabric rise (288 to 316.80, +28.80):
- Prime cost 398 + 28.80 = 426.80
- Rejection: 426.80 / 0.97 = 440.00
- Overhead: 440.00 x 1.12 = 492.80
- Profit: 492.80 x 1.08 = 532.22
- Plus sample 9.00 = 541.22 rupees cost against 531.41 rupees realisation.
Result: a loss of about 9.80 rupees per piece, roughly 19,600 rupees on the order. A 10% fabric movement is entirely plausible over 60 days, so an unhedged fixed price at USD 6.50 is not safe.
Recommendation: do not sign on the present terms. Accept only with conditions:
- Lock the fabric price for 60 days, or buy and hold the 3,200 m before signing - the cheapest protection.
- Improve the marker: moving from about 82% to 86% efficiency cuts consumption to roughly 1.53 m, saving about 13 rupees per piece, more than the entire present margin buffer.
- Cut rejection from 3% to 2% with in-line checks; that alone recovers about 4 rupees per piece.
- Ask for either a 3-4% price increase or a fabric-index clause, and get it in writing before the 15-day quote lapses.
If none of these can be secured, decline politely and keep the buyer relationship for a style where the fabric is stable.