Transaction Risk – Difference in Price
Transaction risk is the threat of loss because of insufficient personnel in the business or deficient systems while financial risk, is a nutshell of abundant variety of hazard linked to financing. Some of the financial risks affecting Gumpbell manufacturers are:
Selling price is the determinant factor for business success and hence Gumpbell manufacturers should set a reasonable selling price that will create returns from investment by covering its variable and production cost. Some of the risks that selling price will pose are:
The Base price
Total production cost per unit for Gumpbell manufacturers is $6.50 per case with a selling price of $8.5 to realize gross profit margin of $2 per case. The gross profit margin value is before incurring the cost of transporting goods to Hong Kong. Financial risk might occur to the business since goods in transit do not have an insurance cover and consequently In case of accidents or theft of goods in transit, Gumpbell manufacturers will incur huge loses.
Point of delivery for pricing purposes
The company intends to supply goods to Hen Hao a company based in Hong Kong. The existing method of transporting goods is deem risky to the business since, the company does not transport the product on a 2-piece hermetically preserved container as proposed by Hen Hao and as a result, the product might burst or leak implying loss to the business. The business should therefore ensure that its product are with good seal using safe packaging material as well insured to curb the effect of uncertainties. The company should capitalize this cost as part of production cost and realized back in setting the appropriate selling price that will earn a profit margin to the business.
Component included in base price
The selling price for the product includes the cost of production such as cost of material and labor cost. The existing cost per unit of production is risky to the business because, it does not include other factors such as insurance cost and effect of contingencies. The labor union is negotiating the cost of labor in which workers will be paid an increment of 0.5$ implying that the selling price of the product is going to increase to $10 per case.
Adjustment Included In Base Price
In order to reduce the effect of future uncertainties to the business, The Company should included the terms of agreement between the company and the labor union in a contract deal with Hen Hao before starting the business. The adjustment will help reduce the effect of misunderstanding that might occur due to increase in cost of production brought by incremental labor cost. Hen Hao will receive a notice of adjustment before Gumpbell produces the product under the new labor cost in order to ascertain whether Hen Hao will consider revising the current selling price imposed by Gumpbell manufacturers.
The product has a code by date and time of production. This is an efficient system of control but the cost of coding remains fixed. The company issues an online invoice together with delivery note to Hen Hao when goods are on shipment.
The due date for payment is when Hen Hao receives goods, inspects, and approves them since, the credit terms provides that Hen Hao will inspect the product for quality assurance reasons and improves before remitting cash.
Methods of Payment
Gumpbell manufacturers prefer short-term payment since the company is conservative and avoid risky investment. Hen Hao intends to use letter of credit and thus the document required is the bill of lading, in which it serves as means exchange of payment.