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Crosswell International and Brazil insurance, and freight) is $39.18 per case, or 9795 Brazilian real per case, assuming an exchange rate of 2.50 Brazilian real (R$) per U.S. dollar ($). In summary, the CIF cost of R$9795 is the price charged by the exporter to the importer on arrival in Brazil, and is calculated as follows: Crosswell International is a U.S.-based manufacturer and distributor of health care products, including children's dia- pers. Crosswell has been approached by Leonardo Sousa, the president of Material Hospitalar, a distributor of health care products throughout Brazil. Sousa is interested in dis tributing Crosswell's major diaper product, Precious Dia- pers, but only if an acceptable arrangement regarding pricing and payment terms can be reached. CIF FAS freight + export insurance = ($ 34.00 $4.32 $0.86) x R$2.50/S R$97.95 The actual cost to the distributor in getting the dia- pers through the port and customs warehouses must also be calculated in terms of what Leonardo Sousa's costs are Exporting to Brazil in reality. The various fees and taxes detailed in Exhibit A raise the fully landed cost of the Precious Diapers to R$10763 per case. The distributor would now bear stor age and inventory costs totaling R$8.33 per case, which would bring the costs to R$115.96. The distributor then adds a margin for distribution services of 20% (R$23.19), raising the price as sold to the final retailer to R$139.15 per case Finally, the retailer (a supermarket or other retailer of consumer health care products) would include its expenses, taxes, and markup to reach the final shelf price to the cus- tomer of R$245.48 per case. This final retail price estimate now allows both Crosswell and Material Hospitalar to eval- uate the price competitiveness of the Precious Ultra-Thin Diaper in the Brazilian marketplace, and provides a basis for further negotiations between the two parties. The Precious Ultra-Thin Diaper will be shipped via container. Each container will hold 968 cases of diapers. The costs and prices in Exhibit A are calculated on a per case basis, although some costs and fees are assessed by container. Crosswell's manager for export operations, Geoff Mathieux, followed up the preliminary discussions by putting together an estimate of export costs and pricing for discussion pur- poses with Sousa. Crosswell needs to know all of the costs and pricing assumptions for the entire supply and value chain as it reaches the consumer. Mathieux believes it criti- cal that any arrangement that Crosswell enters into results in a price to consumers in the Brazilian marketplace that is both fair to all parties involved and competitive, given the market niche Crosswell hopes to penetrate. This first cut on pricing Precious Diapers into Brazil is presented in Exhibit A Crosswell proposes to sell the basic diaper line to the Brazilian distributor for $34.00 per case, FAS (free alongside ship) Miami docks. This means that the seller, Crosswell, agrees to cover all costs associated with getting the diapers to the Miami docks. The costs of loading the diapers onto the ship, of the actual shipping (freight), and of the associated documents is $4.32 per case. The running subtotal, $38.32 per case, is termed CFR (cost and freight). Finally, the insurance expenses related to the potential loss of the goods while in transit to final port of destination, export insurance, are $0.86 per case. The total CIF (cost, Mathieux provides the export price quotation shown in Exhibit A, an outline of a potential representation agree- ment (for Sousa to represent Crosswell's product lines in EXHIBIT A Export Pricing for the Precious Diaper Line to Brazil The Precious Ultra-Thin Diaper will be shipped via container. Each container will hold 968 cases of diapers. The costs and prices below are calculated on a per case basis, although some costs and fees are assessed per container. Exports Costs & Pricing to Brazil Per Case Rates & Calculation FAS price per case, Miami $34.00 Freight, loading & documentation 4.32 $4,180 per container/968 $4.32 CFR price per case, Brazilian port (Santos) $38.32 Export insurance 0.86 2.25% of CIF CIF to Brazilian port $39.18 CIF to Brazilian port, in Brazilian real R$97.95 2.50 Real/US$ x $39.18 Brazilian Importation Costs Import duties 1.96 2.00% of CIF Merchant marine renovation fee 25.00% of freight 2.70 Port storage fees 1.27 1.30% of CIF Port handling fees 0.01 R$12 per container Additional handling fees 0.26 20.00% of storage & handling Customs brokerage fees 1.96 2.00% of CIF Import license fee R$50 per container 0.05 Local transportation charges Total cost to distributor in real 1.47 1.50% of CIF R$107.63 Distributor's Costs & Pricing Storage cost 1.47 1.50% of CIF x months Cost of financing diaper inventory 6.86 7.00% of CIF x months 20.00% of Price + storage financing Distributor's margin 23.19 Price to retailer in real a bR$139.15 Brazilian Retailer Costs & Pricing 15.00% of price to retailer 18.00 % of price IPT 30.00% of price IPT MCS Industrial product tax (IPT) 20.87 Mercantile circulation services tax (MCS) 28.80 + Retailer costs and markup 56.65 + Price to consumer in real R$245.48 Diaper Prices to Consumers Price per Diaper Diapers per Case Small size 352 R$0.70 Medium size R$0.96 256 Large size 192 R$1.28 for the Precious Diaper line. These last requests allow Crosswell to assess Material Hospitalar's ability to be a dependable, creditworthy, and capable long-term partner and representative of the firm in the Brazilian marketplace. The discussions that follow focus on finding acceptable common ground between the two parties and on work- ing to increase the competitiveness of the Precious Diaper product line in the Brazilian marketplace. the Brazilian marketplace), and payment and credit terms to Leonardo Sousa. Crosswell's payment and credit terms are that Sousa either pay in full in cash in advance, or remit a confirmed irrevocable documentary L/C with a time draft specifying a tenor of 60 days. Crosswell also requests from Sousa financial state ments, banking references, foreign commercial references, descriptions of regional sales forces, and sales forecasts Crosswell's Proposal 2. Receive the discounted value of this amount today. The discounted amount, assuming U.S. dollar interest rate of 6.00% per annum (1.00 % per 60 days ): The proposed sale by Crosswell to Material Hospitalar, at least in the initial shipment, is for 10 containers of 968 cases of diapers at $39.18 per case, CIF Brazil, payable in U.S. dollars. This is a total invoice amount of $379,262.40. Payment terms are that a confirmed L/C will be required of Material Hospita- lar on a U.S. bank. The payment will be based on a time draft of 60 days, presentation to the bank for acceptance with other documents on the date of shipment. Both the exporter and the exporter's bank will expect payment from the importer or the importer's bank 60 days from this date of shipment. $379,262.40 $379,262.40 $375,507.33. (1+0.01) 1.01 Because the invoice is denominated in U.S. dollars, Crosswell need not worry about currency value changes (currency risk). And because its bank has confirmed the L/C, it is protected against changes or deteriorations in Material Hospitalar's ability to pay on the future date. What Should Crosswell Expect? What Should Material Hospitalar Expect? Assuming Material Hospitalar acquires the L/C and it is confirmed by Crosswell's bank in the United States, Cross- well will ship the goods after the initial agreement, say 15 days, as illustrated in Exhibit B Simultaneous with the shipment, when Crosswell has lost physical control over the goods, Crosswell will pre- sent the bill of lading (acquired at the time of shipment) with the other needed documents to its bank requesting payment. Because the export is under a confirmed L/C assuming all documents are in order, Crosswell's bank will give Crosswell two choices: Material Hospitalar will receive the goods on or before day 60. It will then move the goods through its distribution sys- tem to retailers. Depending on the payment terms between Material Hospitalar and its buyers (retailers), it could either receive cash or terms for payment for the goods. Because Material Hospitalar purchased the goods via the 60-day time draft and an L/C from its Brazilian bank, total payment of $379,262.40 is due on day 90 (shipment and presentation of documents was on 30+ 60 day time draft) to the Brazilian bank. Material Hospitalar, because it is a Brazilian-based company and has agreed to make payment in U.S. dollars (foreign currency), carries the currency risk of the transaction 1. Wait the full time period of the time draft of 60 days and receive the entire payment in full ($379,262.40). EXHIBIT B Export Payment Terms on Crosswell's Export to Brazil Time (day count) and Events 0 3 10 15 30 60 90 Crosswell Crosswell's Crosswell Goods agrees to ship under an L/C bank confirms ships goods arrive at L/C and notifies Crosswell Brazilian port Material Hospitalar applies to its bank in So Paulo for an Period of outstanding account receivable (60-day time draft) L/C Brazilian bank approves L/C and issues in favor of Crosswell; L/C sent to Crosswell's bank Crosswell presents documents to its bank for acceptance and payment of $379.262 (today is "sight") Crosswell's bank pays Material Hospitalar makes payment to its bank of $379,262 discounted value of acceptance of $375,507 EXHIBIT C Competitive Diaper Prices in the Brazilian Market (in Brazilian real) Price per Diaper by Size Company (Country) Brand Small Medium Large Kenko (Japan) Monica Plus 0.68 0.85 1.18 Procter & Gamble (USA) Pampers Uni 0.65 0.80 1.08 Sempre Seca Plus Johnson & Johnson (USA) 0.65 0.80 1.08 Crosswell (USA) Precious 1.40 0.70 0.96 Crosswell/Material Hospitalar's Concern MINI-CASE QUESTIONS The concern the two companies hold, however, is that the total price to the consumer in Brazil, R$245.48 per case, or R$0.70/diaper (small size), is too high. The major competi- tors in the Brazilian market for premium quality diapers Kenko do Brasil (Japan), Johnson and Johnson (U.S.), and Procter and Gamble (U.S.), are cheaper (see Exhibit C) The competitors all manufacture in-country, thus avoiding the series of import duties and tariffs, which have added significantly to Crosswell's landed prices in the Brazilian marketplace. How are pricing, currency of denomination, and financing interrelated in the value-chain for Cross well's penetration of the Brazilian market? Can you summarize them using Exhibit B? 1. How important is Sousa to the value-chain of Cross- well? What worries might Crosswell have regarding Sousa's ability to fulfill his obligations? If Crosswell is to penetrate the market, some way oof reducing its prices will be required. What do you suggest? 2. 3. Crosswell International and Brazil insurance, and freight) is $39.18 per case, or 9795 Brazilian real per case, assuming an exchange rate of 2.50 Brazilian real (R$) per U.S. dollar ($). In summary, the CIF cost of R$9795 is the price charged by the exporter to the importer on arrival in Brazil, and is calculated as follows: Crosswell International is a U.S.-based manufacturer and distributor of health care products, including children's dia- pers. Crosswell has been approached by Leonardo Sousa, the president of Material Hospitalar, a distributor of health care products throughout Brazil. Sousa is interested in dis tributing Crosswell's major diaper product, Precious Dia- pers, but only if an acceptable arrangement regarding pricing and payment terms can be reached. CIF FAS freight + export insurance = ($ 34.00 $4.32 $0.86) x R$2.50/S R$97.95 The actual cost to the distributor in getting the dia- pers through the port and customs warehouses must also be calculated in terms of what Leonardo Sousa's costs are Exporting to Brazil in reality. The various fees and taxes detailed in Exhibit A raise the fully landed cost of the Precious Diapers to R$10763 per case. The distributor would now bear stor age and inventory costs totaling R$8.33 per case, which would bring the costs to R$115.96. The distributor then adds a margin for distribution services of 20% (R$23.19), raising the price as sold to the final retailer to R$139.15 per case Finally, the retailer (a supermarket or other retailer of consumer health care products) would include its expenses, taxes, and markup to reach the final shelf price to the cus- tomer of R$245.48 per case. This final retail price estimate now allows both Crosswell and Material Hospitalar to eval- uate the price competitiveness of the Precious Ultra-Thin Diaper in the Brazilian marketplace, and provides a basis for further negotiations between the two parties. The Precious Ultra-Thin Diaper will be shipped via container. Each container will hold 968 cases of diapers. The costs and prices in Exhibit A are calculated on a per case basis, although some costs and fees are assessed by container. Crosswell's manager for export operations, Geoff Mathieux, followed up the preliminary discussions by putting together an estimate of export costs and pricing for discussion pur- poses with Sousa. Crosswell needs to know all of the costs and pricing assumptions for the entire supply and value chain as it reaches the consumer. Mathieux believes it criti- cal that any arrangement that Crosswell enters into results in a price to consumers in the Brazilian marketplace that is both fair to all parties involved and competitive, given the market niche Crosswell hopes to penetrate. This first cut on pricing Precious Diapers into Brazil is presented in Exhibit A Crosswell proposes to sell the basic diaper line to the Brazilian distributor for $34.00 per case, FAS (free alongside ship) Miami docks. This means that the seller, Crosswell, agrees to cover all costs associated with getting the diapers to the Miami docks. The costs of loading the diapers onto the ship, of the actual shipping (freight), and of the associated documents is $4.32 per case. The running subtotal, $38.32 per case, is termed CFR (cost and freight). Finally, the insurance expenses related to the potential loss of the goods while in transit to final port of destination, export insurance, are $0.86 per case. The total CIF (cost, Mathieux provides the export price quotation shown in Exhibit A, an outline of a potential representation agree- ment (for Sousa to represent Crosswell's product lines in EXHIBIT A Export Pricing for the Precious Diaper Line to Brazil The Precious Ultra-Thin Diaper will be shipped via container. Each container will hold 968 cases of diapers. The costs and prices below are calculated on a per case basis, although some costs and fees are assessed per container. Exports Costs & Pricing to Brazil Per Case Rates & Calculation FAS price per case, Miami $34.00 Freight, loading & documentation 4.32 $4,180 per container/968 $4.32 CFR price per case, Brazilian port (Santos) $38.32 Export insurance 0.86 2.25% of CIF CIF to Brazilian port $39.18 CIF to Brazilian port, in Brazilian real R$97.95 2.50 Real/US$ x $39.18 Brazilian Importation Costs Import duties 1.96 2.00% of CIF Merchant marine renovation fee 25.00% of freight 2.70 Port storage fees 1.27 1.30% of CIF Port handling fees 0.01 R$12 per container Additional handling fees 0.26 20.00% of storage & handling Customs brokerage fees 1.96 2.00% of CIF Import license fee R$50 per container 0.05 Local transportation charges Total cost to distributor in real 1.47 1.50% of CIF R$107.63 Distributor's Costs & Pricing Storage cost 1.47 1.50% of CIF x months Cost of financing diaper inventory 6.86 7.00% of CIF x months 20.00% of Price + storage financing Distributor's margin 23.19 Price to retailer in real a bR$139.15 Brazilian Retailer Costs & Pricing 15.00% of price to retailer 18.00 % of price IPT 30.00% of price IPT MCS Industrial product tax (IPT) 20.87 Mercantile circulation services tax (MCS) 28.80 + Retailer costs and markup 56.65 + Price to consumer in real R$245.48 Diaper Prices to Consumers Price per Diaper Diapers per Case Small size 352 R$0.70 Medium size R$0.96 256 Large size 192 R$1.28 for the Precious Diaper line. These last requests allow Crosswell to assess Material Hospitalar's ability to be a dependable, creditworthy, and capable long-term partner and representative of the firm in the Brazilian marketplace. The discussions that follow focus on finding acceptable common ground between the two parties and on work- ing to increase the competitiveness of the Precious Diaper product line in the Brazilian marketplace. the Brazilian marketplace), and payment and credit terms to Leonardo Sousa. Crosswell's payment and credit terms are that Sousa either pay in full in cash in advance, or remit a confirmed irrevocable documentary L/C with a time draft specifying a tenor of 60 days. Crosswell also requests from Sousa financial state ments, banking references, foreign commercial references, descriptions of regional sales forces, and sales forecasts Crosswell's Proposal 2. Receive the discounted value of this amount today. The discounted amount, assuming U.S. dollar interest rate of 6.00% per annum (1.00 % per 60 days ): The proposed sale by Crosswell to Material Hospitalar, at least in the initial shipment, is for 10 containers of 968 cases of diapers at $39.18 per case, CIF Brazil, payable in U.S. dollars. This is a total invoice amount of $379,262.40. Payment terms are that a confirmed L/C will be required of Material Hospita- lar on a U.S. bank. The payment will be based on a time draft of 60 days, presentation to the bank for acceptance with other documents on the date of shipment. Both the exporter and the exporter's bank will expect payment from the importer or the importer's bank 60 days from this date of shipment. $379,262.40 $379,262.40 $375,507.33. (1+0.01) 1.01 Because the invoice is denominated in U.S. dollars, Crosswell need not worry about currency value changes (currency risk). And because its bank has confirmed the L/C, it is protected against changes or deteriorations in Material Hospitalar's ability to pay on the future date. What Should Crosswell Expect? What Should Material Hospitalar Expect? Assuming Material Hospitalar acquires the L/C and it is confirmed by Crosswell's bank in the United States, Cross- well will ship the goods after the initial agreement, say 15 days, as illustrated in Exhibit B Simultaneous with the shipment, when Crosswell has lost physical control over the goods, Crosswell will pre- sent the bill of lading (acquired at the time of shipment) with the other needed documents to its bank requesting payment. Because the export is under a confirmed L/C assuming all documents are in order, Crosswell's bank will give Crosswell two choices: Material Hospitalar will receive the goods on or before day 60. It will then move the goods through its distribution sys- tem to retailers. Depending on the payment terms between Material Hospitalar and its buyers (retailers), it could either receive cash or terms for payment for the goods. Because Material Hospitalar purchased the goods via the 60-day time draft and an L/C from its Brazilian bank, total payment of $379,262.40 is due on day 90 (shipment and presentation of documents was on 30+ 60 day time draft) to the Brazilian bank. Material Hospitalar, because it is a Brazilian-based company and has agreed to make payment in U.S. dollars (foreign currency), carries the currency risk of the transaction 1. Wait the full time period of the time draft of 60 days and receive the entire payment in full ($379,262.40). EXHIBIT B Export Payment Terms on Crosswell's Export to Brazil Time (day count) and Events 0 3 10 15 30 60 90 Crosswell Crosswell's Crosswell Goods agrees to ship under an L/C bank confirms ships goods arrive at L/C and notifies Crosswell Brazilian port Material Hospitalar applies to its bank in So Paulo for an Period of outstanding account receivable (60-day time draft) L/C Brazilian bank approves L/C and issues in favor of Crosswell; L/C sent to Crosswell's bank Crosswell presents documents to its bank for acceptance and payment of $379.262 (today is "sight") Crosswell's bank pays Material Hospitalar makes payment to its bank of $379,262 discounted value of acceptance of $375,507 EXHIBIT C Competitive Diaper Prices in the Brazilian Market (in Brazilian real) Price per Diaper by Size Company (Country) Brand Small Medium Large Kenko (Japan) Monica Plus 0.68 0.85 1.18 Procter & Gamble (USA) Pampers Uni 0.65 0.80 1.08 Sempre Seca Plus Johnson & Johnson (USA) 0.65 0.80 1.08 Crosswell (USA) Precious 1.40 0.70 0.96 Crosswell/Material Hospitalar's Concern MINI-CASE QUESTIONS The concern the two companies hold, however, is that the total price to the consumer in Brazil, R$245.48 per case, or R$0.70/diaper (small size), is too high. The major competi- tors in the Brazilian market for premium quality diapers Kenko do Brasil (Japan), Johnson and Johnson (U.S.), and Procter and Gamble (U.S.), are cheaper (see Exhibit C) The competitors all manufacture in-country, thus avoiding the series of import duties and tariffs, which have added significantly to Crosswell's landed prices in the Brazilian marketplace. How are pricing, currency of denomination, and financing interrelated in the value-chain for Cross well's penetration of the Brazilian market? Can you summarize them using Exhibit B? 1. How important is Sousa to the value-chain of Cross- well? What worries might Crosswell have regarding Sousa's ability to fulfill his obligations? If Crosswell is to penetrate the market, some way oof reducing its prices will be required. What do you suggest? 2. 3

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