Question

Solar Charge is a company that manufactures solar panels for use in residential buildings. It has received an unsolicited request from a foreign buyer, willing to buy 100,000 units at $1200 each (Ex-works). It will take a year to fulfill the order and the purchaser will pay the entire amount owing when a shipment is completed. The cost of producing each unit is $1000 and the company would have to take out a loan to finance the production of the order. Its cost of capital is 10 percent per annum. The manager of the export office recommends that the company respond favourably to the foreign request, especially since it sells the panels on the domestic market for only $1100 per unit. What does the finance department say?

Answer 1

Let us look at this problem on per sonal panel basis.

Domestic Sales

Cost of Production = $ 1,000

Domestic Sales Price = $ 1,100

Domestic Gross Profit Margin = $ 1,100 - $ 1,000 = $ 100

Foreign Sales

For executing the foreign order, we need to take a loan.

Production time = Tenor of the loan = 12 months = 1 year .... given

Interest rate on the loan = 10% ...given

Interest Cost per solar panel = 10% x Cost of Production = 10% x $1,000

Interest Cost per solar panel = $100

Cost of Production for exports = Regular Cost of production (domestic) + Interest cost on loan

Cost of Production for exports = $ 1,000 + $ 100 = $ 1,100

Sales Price for exports = $ 1,200

Exports Gross Profit Margin = $ 1,200 - $ 1,100 = $100

The Gross Profit Margin for domestic and export sales are the same. The finance department suggests to consider the order favourably. The rationale is not because the sale price is high but the gross margin are the same as conpared to the domestic market. Hence, if there is a production capacity available, the company should consider the order favourably.