The price of oil can fluctuate dramatically based on the economic principles of supply and demand. As new economic powers emerge, such as China and India, the demand for oil continues to increase. Add the recent political instability of major oil exporting nations in the Middle East, and it is no wonder that oil prices are volatile. As a manager it is important to understand that the unpredictable oil market can dramatically affect profit margins. Most companies, especially those extremely dependent on oil, hedge this risk by purchasing oil futures to lock in prices. This makes it easier to predict future cash flows and eliminates the risk of uncertainty in the oil markets. When oil prices increase, the cost of shipping and landing goods in foreign countries often increase as well. Allstar is selling toothpaste in Argentina that is sourced from your Peru plant. Due to a spike in crude oil prices and speculation of future increases, your shipping costs are expected to double next period (increase 100%). Consider a particular SKU you sell in Argentina, the Economy Medium Tube of Paste (EMTP). The EMTP currently has revenue per unit for Allstar of 46.35 ARS (this revenue per unit is the MSRP less allowance and average channel volume discount). Allstar currently sells 1,000,000 EMTP units per year in Argentina. Per unit production, shipping, and tariff costs from the Peru plant to Argentina are Previous Period Plant Location Peru COGS $ (Economy Medium Tube Paste) 0.410 Original Costs ($) Argentina Shipping 0.020 COGS+Shipping 0.430 Tariff % 20% Tariff $ 0.086 Total Landed Cost $ (COGS+Shipping+Tariff) 0.516 Exchange rate 59.880 Total Landed Cost ARS 30.898 The exchange rate is 59.8802 Argentina Pesos (ARS) per USD.

First, how will the change in shipping costs affect the total unit landed cost for this SKU?

Answer rating: 100% (QA)

To calculate how the change in shipping costs will affect the total unit landed cost for the Economy ... View the full answer