The ex-factory price represents the cost of the product at the factory or manufacturing facility where it is produced. It does not include transportation costs, export fees, or any other expenses incurred after the goods leave the factory. The buyer is responsible for arranging and paying for transportation, insurance, customs clearance, and any other costs associated with getting the goods to their desired destination.
Ex-factory pricing is commonly used in international trade and is often preferred by sellers who want to minimize their responsibilities and costs associated with shipping and logistics. It gives the buyer more control over transportation and allows them to negotiate favorable shipping terms with their preferred carriers. However, it also places more responsibility and risk on the buyer arranging and managing the logistics of the shipment.
Hence, when the Ex-factory price is used, the buyer is responsible for arranging the pickup of the goods from the factory. It is the exact amount of product the manufacturer charges to the distributor or the dealers as a product price. Often distributors and wholesale companies purchase goods directly from the factory by providing their transport.
If the buyer agrees with ex-factory terms, he would be liable to undertake all the shipping costs from the buyer’s place of business until it reaches his point of delivery. Under the guidance of the buyer, the entire work of the goods, loading from the seller’s warehouse will be completed. That means the buyer will hire trucks, or any other transport to carry the goods and the buyer is solely responsible for that part and will bear transport costs. Here the buyer appoints a shipping and freight forwarding company to collect goods from the seller’s factory to the buyer’s place including insurance of goods. It is one of the 11 current Incoterms.
Example of Ex-factory Price:
Suppose a company, XYZ Electronics, manufactures smartphones in its factory located in Country A. The production cost of each smartphone, including materials, labor, and overhead, is $200. This $200 represents the Ex factory price because it reflects the cost of producing the smartphones at the factory.
Now, a buyer, ABC Retail, located in Country B, wants to purchase 1,000 smartphones from XYZ Electronics. The agreed Ex factory price for each smartphone is $200.
Here’s how the transaction would proceed:
- XYZ Electronics manufactures the smartphones in its factory in Country A.
- Once the smartphones are ready for delivery, XYZ Electronics notifies ABC Retail that the goods are available for pickup at their factory in Country A.
- ABC Retail arranges and pays for transportation, insurance, and any other costs associated with transporting the smartphones from XYZ Electronics’ factory in Country A to its own location in Country B.
- ABC Retail assumes ownership and responsibility for the smartphones once they are picked up from XYZ Electronics’ factory.
In this example, the Ex factory price of $200 per smartphone only covers the cost of production at XYZ Electronics’ factory in Country A. ABC Retail is responsible for all additional costs and logistics associated with transporting the smartphones from the factory to its location in Country B.