Factory price
Factory price, also called ex-works price or ex-factory price, is the cost of a product at the manufacturing facility before any transportation, handling, or delivery charges are added. This pricing method represents the baseline cost that a manufacturer charges for goods ready to leave the production site.
The term derives from international trade terminology and appears in the Incoterms rules published by the International Chamber of Commerce.
Definition and Components
Factory price includes all costs incurred during production[1]:
- Raw materials
- Direct labor costs
- Manufacturing overhead
- Production equipment depreciation
- Quality control and testing
- Packaging (basic packaging for shipment)
- Manufacturer's profit margin
The price does not include costs beyond the factory gate. Transportation, insurance, customs duties, import taxes, and delivery expenses fall outside factory price. Buyers assume responsibility for these additional costs when purchasing at ex-works terms.
Ex-Works (EXW) in International Trade
EXW represents a specific Incoterm defining buyer and seller responsibilities. The seller's obligation ends when goods are made available at the factory or warehouse. From that point forward, the buyer bears all risks and costs.
This arrangement suits sellers who want minimal logistics involvement. Buyers gain control over shipping arrangements but must manage complex international transportation. Companies with experience in freight forwarding often prefer EXW terms.
Relationship to Other Pricing Terms
Factory price connects to several other pricing concepts in supply chain management:
FOB (Free On Board) - Includes factory price plus loading costs onto the shipping vessel. Risk transfers to buyer once goods cross the ship's rail.
CIF (Cost, Insurance, Freight) - Covers factory price, loading, maritime freight, and insurance to the destination port.
Landed Cost - The total cost when goods arrive at their final destination. This includes factory price plus all transportation, handling, duties, tariffs, and taxes.
Understanding these distinctions helps purchasers compare quotes accurately. A lower factory price may result in higher total costs if shipping expenses are substantial.
Calculation Methods
Manufacturers determine factory prices through various approaches[2]:
Cost-Plus Pricing - Calculate total production costs and add a percentage markup for profit. Simple to implement but may not reflect market conditions.
Target Costing - Start with the market price buyers will accept and work backward to determine allowable production costs. Common in competitive industries.
Activity-Based Costing - Assign costs to products based on the activities required to produce them. More accurate for complex manufacturing operations.
Applications in Business
Factory pricing serves several purposes:
Procurement - Buyers use factory prices as benchmarks when evaluating supplier quotes. Separating manufacturing costs from logistics costs enables better analysis.
Cost Control - Tracking factory prices over time reveals production efficiency trends. Rising factory prices may signal material cost increases or productivity problems.
Transfer Pricing - Multinational companies use factory prices when determining intercompany charges between manufacturing subsidiaries and distribution units.
Contract Manufacturing - Brands contracting production to third-party factories negotiate based on factory price. Logistics and distribution remain the brand's responsibility.
Advantages and Disadvantages
Advantages for Sellers:
- Minimal logistics responsibility
- Reduced shipping risk
- Simpler operations focused on manufacturing
- Price transparency
Disadvantages for Sellers:
- Less control over customer experience
- May lose business to competitors offering delivered pricing
- Limited ability to capture margin on logistics services
Advantages for Buyers:
- Control over shipping arrangements
- Potential savings through optimized logistics
- Transparency into manufacturing costs
- Flexibility in routing decisions
Disadvantages for Buyers:
- Must manage complex shipping
- Bears full transportation risk
- Requires logistics expertise
- May face unexpected costs
Industry Variations
Factory price conventions vary by industry. In retail apparel, the term often refers specifically to production costs without brand markup. Electronics manufacturers may quote factory prices that include component sourcing from multiple locations. Commodity industries typically use standardized factory price definitions.
Regional differences also exist. European and Asian suppliers commonly quote ex-works prices. North American domestic transactions more often use delivered pricing.
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References
- International Chamber of Commerce (2020). Incoterms 2020
- Globalior (2024). What is Ex Factory Price?
- Toolio (2024). Difference between Landed Cost, FOB Cost or Ex-Factory Cost
- European Commission (2024). Ex works price - Access2Markets
Footnotes
[1] Exact components vary by industry and company accounting practices. Some manufacturers include research and development allocation in factory price; others treat R&D as corporate overhead.
[2] The costing method used affects quoted factory prices. Buyers should understand supplier costing approaches when negotiating.