Mini Case: Taurus Manufacturing

V $2$ B

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

Baker: Ed$,$ how is Taurus 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 $3,600$ pesos or $$6\mathrm{.}00$ a quart.

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

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

Baker: Great, how are you going to do it$?$ It need to be honest, Ed$.$

Anderson: Well, you know that they must pay $50\%$ percent ad valorem import duty on our $$3\mathrm{.}20$ invoice price plus $70$ pesos per quart specific duty. If$,$ however, we send them the adhesive in a $55-$gallon drum, the import duty drops to $20$ percent ad valorem plus a specific duty of $6000$ 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$$t have to fill the cans or charge them for cans and labels, we will save $40$ cents per quart, which we$$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 $480$ pesos per can and 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 labor are more expensive in Colombia than they are here. Where is the advantage?

Anderson: Let me show you, Baker

You are Ed Anderson. Show Baker the calculation for your recommendation to ship in bulk. Disregard any possible Insurance cost increase and freight saving for shipping in bulk.

Use exchange rate: Pesos $1=$ $$\mathrm{.}0013($rounded$)$