- 20 Marks
Question
Question: QUESTION 3 Held and Sons are Stockholders in London whose account is operated on Overdraft basis. Hitherto, they have obtained their Stocks in the UK, but they are now forced to look elsewhere for supplies of specialised steel. They have received the following quotations:
| Country | Price Per Ton | Payment Terms |
|---|---|---|
| a. Norway | NOK 2,125 FOB, Oslo | Open Account: Settlement one month after shipment. |
| b. Denmark | DKK 1,560 CFR, London | Draft drawn payable two months after shipment (Collection Charges for buyer). |
| c. Turkey | TRY 2112 CIF, London | Irrevocable Documentary Credit payable three months after shipment. |
Using additional information set out below, show by calculating the cost of 100 tons of the steel, which of quotations (a), (b) and (c) would be the cheapest for your customer. Freight charges from any European Port £5 per ton Insurance (to be effected on 110% of CIF value) 1% payable in £ Collection Charges (total for both banks) ¼ % Documentary Credit Charges (including Acceptance Commission) ¾ % Overdraft Interest for one month (considered as 1/12 of a year) 15% pa. Ignore all other possible charges. It is to be assumed that your customers would have covered any Exchange Risk on the day of shipment, in accordance with rates quoted below, and that all payments and charges relative to any particular quotation are debited on the same day.
Spot One Month Two Months Three Months Norway 12.20 – 12.50 10 – 12c disc 15 – 18c disc 20 – 23c disc Denmark 8.90 – 9.10 8 – 5c pm 10 – 8c pm 14 – 11c pm Turkey 11.80 – 12.05 12 – 9c pm 14 – 11c pm 16 – 12c pm
[Total Marks 20]
Answer
Calculations for 100 tons of steel. Rates are foreign currency per GBP. For buying foreign currency, use forward offer rate (adjusted for disc/pm). Overdraft interest = 15% p.a., monthly = 1.25%.
Quotation (a) Norway – FOB, one month forward
FOB NOK = 2,125 × 100 = 212,500 NOK
One month forward offer = 12.50 – 0.10 = 12.40 NOK/GBP
FOB GBP = 212,500 / 12.40 = 17,137.10 GBP
Freight = 5 × 100 = 500 GBP
CIF GBP = (17,137.10 + 500) / (1 – 0.01 × 1.1) = 17,637.10 / 0.989 = 17,833.26 GBP
Insurance = 0.01 × 1.1 × 17,833.26 = 196.17 GBP
Total (goods + freight + insurance) = 17,137.10 + 500 + 196.17 = 17,833.27 GBP
Interest (1 month) = 17,833.27 × 1.25% = 222.92 GBP
Total cost = 17,833.27 + 222.92 = 18,056.19 GBP
Quotation (b) Denmark – CFR, two months forward
CFR DKK = 1,560 × 100 = 156,000 DKK
Two months forward offer = 9.10 + 0.08 = 9.18 DKK/GBP
CFR GBP = 156,000 / 9.18 = 16,993.46 GBP
CIF GBP = 16,993.46 / 0.989 = 17,183.68 GBP
Insurance = 0.01 × 1.1 × 17,183.68 = 189.02 GBP
Collection charges = 0.25% × 16,993.46 = 42.48 GBP
Total = 16,993.46 + 189.02 + 42.48 = 17,224.96 GBP
Interest (2 months) = 17,224.96 × 2.5% = 430.62 GBP
Total cost = 17,224.96 + 430.62 = 17,655.58 GBP
Quotation (c) Turkey – CIF, three months forward
CIF TRY = 2,112 × 100 = 211,200 TRY
Three months forward offer = 12.05 + 0.12 = 12.17 TRY/GBP
CIF GBP = 211,200 / 12.17 = 17,346.75 GBP
DC charges = 0.75% × 17,346.75 = 130.10 GBP
Total = 17,346.75 + 130.10 = 17,476.85 GBP
Interest (3 months) = 17,476.85 × 3.75% = 655.38 GBP
Total cost = 17,476.85 + 655.38 = 18,132.23 GBP
The cheapest quotation is (b) Denmark at GBP 17,655.58, as it has the lowest effective cost after accounting for exchange rates, charges, and interest on the overdraft.
- Tags: CFR, CIF, collection charges, documentary credit, FOB, Forward Rates, freight, Insurance, overdraft interest, steel quotations
- Level: Level 3
- Topic: Collection of cheques and bills of exchange
- Series: APR 2024
- Uploader: Samuel Duah