MSMW Case Study: Overhead Allocations

MSMW Overhead Allocation: I would recommend that the domestic business carry overheads based on its continued market profitability. John R. Jagoe at Export Institute USA also recommends this. His argument is that there is no reason an export customer should pay for domestic based overhead costs such as local professional fees, local rents, support staff not allocated to export trade functions, equipment or costs associated with domestic marketing or other local taxes, etc. As so many international buyers and consumers of global products make their choices based on cost versus quality issues, domestic overhead carrying costs of export products which are in competitive product or service segments will discourage consumption of those products. However whatever allocation is chosen real costs must continue to be covered or exporting would not make sense. This is the other reason our course as well as Jagoe emphasizes that a company like MSMW is only ready to export if it has a proven success in domestic markets first. This would imply domestic competitiveness is not a serious current challenge for MSMW. While I would not recommend a complete zero allocation of overhead for export products, I would consider limiting overhead to export related costs to those necessary incremental factors such as: insurance, freight, packaging, international trade finance costs, modifications, etc. Opportunity to sell our possible premium water products at inflated retail prices well over costs of exworks factory prices is not only likely but preferred. Good examples of wide profit margins exist in luxury category cars markets (in the past) which often represented few modifications to justify higher prices other than prestige factors. Depending on the retail or distributor arrangements made for sale of our products in a competitive market like Dubai for example, our profits-sharing could possibly be a percentage of sales method with projection-level incentives targets which would require simplified overhead costs to maximize overall profits to costs. In addition our possible supplier or distributor alliances will surely seek to review our costs to ensure they are not paying for domestic overhead. It would make our product that much less expensive to supply to a foreign market which should add up to some necessary minimum profits to take home to justify the process of exporting in the overall difference.