Grosgover Ltd

Profits hinge on budding sales and handling variable and fixed costs. Businesses attempt to increase profit by applying various approaches. Some merely cut costs and anticipate preserving sales/ revenue. Others cut production and channel the savings to the customers in an effort to radically increase sales to surge profit. As in our scenario above Grosgover Ltds decision to change from a local to an overseas supplier is projected to drop 10% in material cost, a variable cost. Variable costs are contingent to sales since they rely on costs of direct materials as well as labor; it is pertinent to mention that all businesses sustain fixed costs irrespective of sales made. Foreign trade has to be approached rationally and with a strong thought process in order to maximise the
benefits and minimise the risks. Similarly the change in material cost resulting from change from a local to an overseas supplier may result into cost cutting benefits as well as inherent risks as enumerated below:
• The variable cost contribution margin articulates how much money a concern is left with after deducting the variable costs from the sales price. The contribution margin must be large enough in order to cover fixed costs. Grosgover Ltd enjoys an increase in contribution margin consequent to its decision to change from a local to an overseas supplier.
• If overseas supplier ships substandard material it is always time consuming and cumbersome to claim a replacement, the business may run out of material before the corrected order is received also it may lead to incur extra shipping or other charges during the return process and ultimately lead to higher costs rather lower anticipated costs.
• Working with overseas suppliers, both, the buyer and supplier desire to execute transaction efficiently. Since mostly overseas suppliers pay upfront this subsequently helps the buyer with working capital.
• It is observed that a reduction in breakeven point results with an increase in the contribution margin per unit. The contribution margin will eventually increase if there is a reduction in per unit variable costs and expenses. The compact variable costs lead to an improvement in contribution margin.
• A decrease in material cost offered by an overseas may result in attaining a higher Margin of safety for the business enabling it to have a wider margin to face a loss by dropping the sales/ revenue from operations.
• unnecessary transportation costs, reducing the need for storage and reducing the costs associated with inventory storage expenses
• The overseas suppliers exclude the idea of last minute changes and flexibility that a local supplier would welcome.
• Selecting suppliers that are reliable and provide quality material that conform to business needs not on single order but as long as the business bond lasts is hard to judge for an overseas supplier. It requires a thoughtful and careful selection of the supplier resulting into lasting and mutually beneficial relationship.
• Selecting approachable suppliers with a rapid follow-up and response to problems will save time when time is of extreme importance.
• If a business depends on one market and directs all its funds in it may turn out to be riskier. Whereas even if the home market is contracting or faces a socio economic or political crisis the business may still flourish due timely availability of material from an overseas
supplier.
• With so many facets to ponder when transacting internationally currency exchange the last consideration. Unfortunately, this leads to getting the undesirable exchange rate which in turn has a negative fall out on the profit.