1. Business Negotiations for
Purchasing and Supply Chain
Management
UNIT – I
Introduction to Contracts and Commercial
Negotiations

2. Contract
 Contract means the contract/agreement between the
Supplier and the Customer for the supply of
Goods and/or Services in accordance with specific
Conditions.
 Contract can differ company to company

3. Invitation to tender letter
 An invitation to tender is a really important
document in construction and other project-based
industries.
 An invitation to tender (ITT, otherwise known as a
call for bids or a request for tenders) is a formal,
structured procedure for generating competing
offers from different potential suppliers or
contractors looking to obtain an award of business
activity in works, supply, or service contracts, often
from companies who have been previously assessed
for suitability by means of a supplier questionnaire
(SQ) or pre-qualification questionnaire (PQQ).
 The term "notice inviting tenders" (NIT) is often used
in purchasing in India
 It is the main instrument which companies in these
industries use to garner interest amongst and
eventually choose the vendors who will work on
their projects.

4.  The tender assessment and decision
process can be lengthy and consuming for
construction companies.
 The invitation to tender (ITT) letter is one of
the first steps in this 'buying' process, and
is often the most exciting for the
companies providing their goods and
services.
 An invitation to tender and invitation to
tender letter can be issued for a number of
different contracts and work types
including:
 Main construction projects and contracts
 Equipment supplies for sites and projects
 Demolition or enabling works

5.  Many contracts in construction start with an
invitation to tender letter, which is why it's
so important to get your invitation to tender
letter formatting and process right.
Invitation to tender letter sample
 The invitation to tender letter sample below
outlines a basic and reliable framework
which many companies use to create and
issue their invitations to tender.
 An invitation to tender letter, as you'll see in
the examples below, can vary from
company to company and project to
project.
 Some companies use the letter as the
formal invite and attach the information
regarding the project, while others include
more project information inside of the

6.  If you are a looking for an easy and
professional ITT format which you can
attach more detailed information to, then
a letter format like this is perfect. It's
simple and does the job.
 If you are looking for a more
comprehensive and professional way to
share and package your invitation to
tender letters, then look below this
sample letter to the document examples.

7. Typical template contents
A typical invitation to tender template in
any project has the following sections:[6]
◦ Introduction
◦ Project background
◦ Legal issues: proposed terms and
conditions of contract
◦ Supplier response required
◦ Timetable for choosing a supplier
◦ Requirements for tender submission, for
example a fully completed but otherwise
unamended form of tender must be
submitted by the specified deadline.

10.  The purpose of this invitation to tender letter
example is to show you a more modern and
comprehensive approach to creating, managing
and then issuing an invitation to tender letter.
 This type of invitation to tender document works
well for projects large and small. Smaller
projects and companies can easily package
their invitations to tender into a complete
invitation to tender template, which can then be
cloned or copied and adjusted for each project.
 Instead of having to write and send an invitation
to tender letter to 4, 5 or more parties, you can
simply clone a document like this, adjust as
required, and then send on to as many parties
as you like in a single click.
 In addition to saving time and admin, this type
of invitation to tender enables you to include
and package more information.

11.  If you hover over the invitation to tender example,
you can expand the example and see the other
pages.
 This framework comes with full sections for the
company background, project information,
respondent instructions and the nature of the
tender assessment.
 This gives the vendors way more information in
regards to what the project and tender process will
look like, and establishes a strong impression
about the project and how information will be
communicated on the project moving forward. You
could even combine these type of invitation to
tender examples with the sample letter above, to
make it an even more formal and professional
outreach.
 The goal of your invitations to tender is to get a
response and eventually suitable project quotes
from suitable vendors, so the more clear and
transparent you can be about the company and
project - the more likely you are to get the vendors

12. Types of Tender
 Open tenders, open calls for tenders, or advertised
tenders are open to all vendors or contractors who can
guarantee performance.
 Restricted tenders, restricted calls for tenders, or invited
tenders are only open to selected pre-qualified vendors
or contractors. The tender stage may form part of a two-
stage process, the first stage of which (as in the
expression-of-interest (EOI) tender call) was itself
advertised, resulting in a shortlist of selected suitable
vendors.
 Sole Source Tenders, where only one potential supplier
is invited to submit a tender.
 The reasons for using restricted tenders differ in scope
and purpose. Restricted tenders can come about
because of:
 Confidentiality issues (such as in military contracts)
 the need for expedience (as in emergency situations)
 a need to exclude tenderers who do not have the financial or
technical capabilities to fulfill the requirements.
 A sole source tender may be used where there is
essentially only one suitable supplier of the services or

13. Tender box
 A tender box is a mailbox used to receive the physical tender or
bid documents.
 When a tender or bid is being called, a tender or bid number is
usually issued as a reference number for the tender box.
 The tender box would be open for interested parties to submit
their proposals for the duration of the bid or tender.
 After the closing date, the tender box is closed and sealed and
can only be opened by either the tender or bid evaluation
committee or a member of the procurement department with two
witnesses.
Double envelope system
 In an open bid or tender system, a double envelope system may
be used.
 The double envelope system separates the technical proposal
(based on and intended to meet the statement of work) from the
financing or cost proposal in the form of two separate and sealed
envelopes.
 During the tender evaluation, the technical proposal would be
opened and evaluated first followed by the financing proposal.
 The objective of this system is to ensure a fair evaluation of the
proposal.
 The technical proposal would be evaluated purely on its technical

14. Security deposit
 Registered contractors may be required to furnish a
bond for a stipulated sum as security or earnest
money deposit to be adjusted against work done,
normally in the form of bank guarantee or surety.
Tender validity date
 A tender validity date is a date until which a
tenderer commits to keeping their prices (and other
tender details) open for acceptance (or otherwise)
by the client.
 Such a date is usually included in a form of
tender, either as a specified date or as the
termination of a specified period from another key
tender date.
 For example in tendering for gym equipment in
2013, West Dunbartonshire Council required
tenderers to accept that "Your tender shall remain
open for acceptance for ninety (90) days from the
date for return of tenders indicated above, or any
subsequent date notified to you by us. Your tender

15. Post-tender negotiation
 Post-tender negotiation involves
negotiation between an intending buyer
and seller after a seller's tender has
been submitted.
 An initial stage may involve tender
clarification, which is intended to
eliminate any uncertainties or
contradictory elements of a proposal,
before moving into a true “negotiation"
phase.
 The Charted Institute of Procurement &
Supply believes that "provided it is
undertaken professionally and
ethically, post tender negotiation is an

16. Quotation
 The quotation may be understood as a
formal document of promise, given by the
prospective supplier, to supply the stated
goods or services needed by the buyer at
the stated price under specific conditions.
 It comprises of terms of sale, payment and
warranty, which includes the price decided
to charge for the product or service, date,
time and place of delivery, validity period of
quotation.
 Quotation helps the buyer in knowing the
cost of goods or services, before making a
purchase. In order to obtain the quotations
(i.e. price for the required material),
generally, tenders are floated by the
government enterprises.

18. Differences Between Quotation & Tender
1. The differences between quotation and tender are
discussed in the points given below:
2. The quotation is a fixed price offer, which once accepted
by the customer, cannot be modified or changed. On the
other extreme, the tender is a response to the invitation
to tender, which is used to find out the best value for
money, from the prospective suppliers.
3. Both quotation and tenders are offers. A quotation is a
response to Request for Quotation (RFQ), whereas
tender is used in response to Request for Tender (RFT).
4. The only major element of the quotation is the price
which explains the cost of the contract, submitted by the
supplier. As against, the tender has two main elements,
price and quality, wherein price determines the best
price offered by the supplier, which is compared with the
other suppliers and quality determines the suppliers
potential to deliver the goods specified.
5. The scope of tender is wider in comparison to tender, as
the quotation is a part of the tender, which contains
prices for material to be supplied.

19. Key Performance Indicators
 A Key Performance Indicator is a measurable value that
demonstrates how effectively a company is achieving key business
objectives.
 A performance indicator or key performance indicator (KPI) is a
type of performance measurement.
 KPIs evaluate the success of an organization or of a particular
activity (such as projects, programs, products and other initiatives)
in which it engages.
 Key performance indicators (KPIs) refer to a set of quantifiable
measurements used to gauge a company’s overall long-term
performance.
 KPIs specifically help determine a company's strategic, financial,
and operational achievements, especially compared to those of
other businesses within the same sector. Key performance
indicators (KPIs) measure a company's success versus a set of
targets, objectives, or industry peers.
 KPIs can be financial, including net profit (or the bottom line, gross
profit margin), revenues minus certain expenses, or the current
ratio (liquidity and cash availability).
 KPIs can also be more anecdotal, measuring foot traffic in a store,
employee retention, repeat customers, and quality of customer
experience, among others

20.  Performance focuses on measuring a particular element of
an activity.
 An activity can have four elements: input, output, control,
and mechanism.
 At a minimum, an activity is required to have at least an
input and an output. Something goes into the activity as
an input; the activity transforms the input by making a
change to its state; and the activity produces an output.
 An activity can also have to enable mechanisms that are
typically separated into human and system mechanisms.
 It can also be constrained in some way by a control.
 Lastly, its actions can have a temporal construct of time.
 Input indicates the inputs required of an activity to produce
an output.
 Output captures the outcome or results of an activity or
group of activities.
 Activity indicates the transformation produced by an
activity (i.e., some form of work).
 Mechanism is something that enables an activity to work (a
performer), either human or system.
 Control is an object that controls the activity's production
through compliance.

21.  Many organizations are working with the wrong measures,
many of which are incorrectly termed key performance
indicators (KPIs).
 I believe it is a myth to consider all performance measures
to be KPIs.
 From my research over the past 25 years I have come to
the conclusion that there are four types of performance
measures.
 These four measures are in two groups: result indicators
and performance indicators.
 I use the term result indicators to reflect the fact that many
measures are a summation of more than one team’s input.
 These measures are useful in looking at the combined
teamwork but, unfortunately, do not help management fix a
problem as it is difficult to pinpoint which teams were
responsible for the performance or nonperformance.
 Performance indicators, on the other hand, are measures
that can be tied to a team or a cluster of teams working
closely together for a common purpose. Good or bad
performance is now the responsibility of one team.
 These measures thus give clarity and ownership

22. MRP in Manufacturing
 A critical input for material requirements planning is
a bill of materials (BOM) - an extensive list of raw
materials, components, and assemblies required to
construct, manufacture or repair a product or
service.
 BOM specifies the relationship between the end
product (independent demand) and the components
(dependent demand). Independent demand
originates outside the plant or production system,
and dependent demand refers to components.
 Companies need to manage the types and
quantities of materials they purchase strategically;
plan which products to manufacture and in what
quantities; and ensure that they are able to meet
current and future customer demand—all at the
lowest possible cost. MRP helps
companies maintain low inventory levels.
 Making a bad decision in any area of the production
cycle will cause the company to lose money. By
maintaining appropriate levels of inventory,

23. Types of Data Considered by MRP
 The data that must be considered in an MRP
scheme include:
◦ Name of the final product that's being created. This
is sometimes called independent demand or Level
"0" on BOM.
◦ What and when info. How much quantity is required
to meet demand? When is it needed?
◦ The shelf life of stored materials.
◦ Inventory status records. Records
of net materials available for use that are already in
stock (on hand) and materials on order from
suppliers.
◦ Bills of materials. Details of the materials,
components, and sub-assemblies required to make
each product.
◦ Planning data. This includes all the restraints and
directions to produce such items as routing, labor

24. Seven Characteristics of KPIs
1. Non Financial
2. Timely
3. CEO focus
4. Simple
5. Team based
6. Significant impact
7. Limited dark side
Non Financial:
◦ When you put a dollar sign on a measure, you have
already converted it into a result indicator (e.g., daily
sales are a result of activities that have taken place to
create the sales).
◦ The KPI lies deeper down. It may be the number of
visits to contacts with the key customers who make
up most of the profitable business.
◦ It is a myth of performance measurement that KPIs
can be financial and nonfinancial indicators.
◦ All KPIs are nonfinancial.

25. Timely:
 KPIs should be monitored 24/7, daily, or perhaps weekly for
some.
 It is a myth that monitoring monthly performance measures
will improve performance.
 A monthly, quarterly, or annual measure cannot be a KPI, as
it cannot be key to your business if you are monitoring it well
after the horse has bolted.
CEO focus:
 All KPIs make a difference; they have the CEO’s constant
attention due to daily calls to the relevant staff.
 Having a career-limiting discussion with the CEO is not
something staff members want to repeat, and in the airline
example innovative and productive processes were put in
place to prevent a recurrence.
Simple:
 A KPI should tell you what action needs to be taken.
 The British Airways late-planes KPI communicated
immediately to everyone that there needed to be a focus on
recovering the lost time.
 Cleaners, caterers, baggage handlers, flight attendants, and
front desk staff would all work some magic to save a minute

26. Team based:
 A KPI is deep enough in the organization that it can be tied to a team.
 In other words, the CEO can call someone and ask, “Why?” Return
on capital employed has never been a KPI, because it cannot be tied
to a manager—it is a result of many activities under different
managers.
 Can you imagine the reaction if a GM was told one morning by the
British Airways official “Pat, I want you to increase the return on
capital employed today.”
Significant impact:
 A KPI will affect one or more of the critical success factors and more
than one balanced-scorecard perspective.
 In other words, when the CEO, management, and staff focus on the
KPI, the organization scores goals in many directions.
 In the airline example, the late-planes KPI affected all six balanced-
scorecard perspectives.
 Again, it is a myth to believe that a measure fits neatly into one
balanced-scorecard perspective
Limited dark side:
 Before becoming a KPI, a performance measure needs to be tested
to ensure that it creates the desired behavioral outcome (e.g., helping
teams to align their behavior in a coherent way to the benefit of the
organization).
 There are many examples where performance measures have led to

27. Contractual term
 A contractual term is "any provision
forming part of a contract".
 Each term gives rise to a contractual
obligation, breach of which can give rise
to litigation.
 Not all terms are stated expressly and
some terms carry less legal gravity as
they are peripheral to the objectives of
the contract.

28. Classification of term
Condition or Warranty
 Conditions are terms that go to the very root of a contract.
 Breach of a condition will entitle the innocent party to
terminate the contract.
 A warranty is less imperative than a condition, so the
contract will survive a breach.
 Breach of either a condition or a warranty will give rise to
damages.
 It is an objective matter of fact whether a term goes to the
root of a contract.
 By way of illustration, an actress's obligation to perform the
opening night of a theatrical production is a condition,
whereas a singer's obligation to perform during the first
three days of rehearsal is a warranty.
 Statute may also declare a term or nature of term to be a
condition or warranty.
 For example, the Sale of Goods Act 1979 (UK) s15A[6]
provides that terms as to title, description, quality, and
sample (as described in the Act) are conditions save in
certain defined circumstances.

29. Innominate term
 Puff (sales talk): If no reasonable personn hearing
this statement would take it seriously, it is a puff, and
no action in contract is available if the statement
proves to be wrong. It may also be referred to as
"puffery". This is common in television commercials.
 Representation: A representation is a statement of
fact which does not amount to a term of the contract
but it is one that the maker of the statement does
not guarantee the truth of.
 This gives rise to no contractual obligation but may
amount to a tort, for example misrepresentation.
 Term: A term is similar to a representation, but the
truth of the statement is guaranteed by the person
who made the statement therefore giving rise to a
contractual obligation.
For the purposes of Breach of Contract, a term may
further be categorized as a condition, warranty or
innominate term.

30.  Determination of nature of a statement
There are various factors that a court may take into account in determining
the nature of a statement. These include:
 Timing: If the contract was concluded soon after the statement was
made, this is a strong indication that the statement induced the person to
enter into the contract. Lapse of a week within the negotiations of
a car sale was held to amount only to a representation in Routledge v
McKay
 Content of statement: It is necessary to consider what was said in the
given context, which has nothing to do with the importance of a
statement.
 Knowledge and expertise: In Oscar Chess Ltd v Williams,[a person
selling a car to a second-hand car dealer stated, as per a document
received when he bought it, that it was a 1948 Morris, when it transpired
it was a 1939 model car. It was held that the statement did not become a
term because a reasonable person in the position of the car dealer would
not have thought that an inexperienced person would have guaranteed
the truth of the statement. In Dick Bentley Productions Ltd v Harold
Smith (Motors) Ltd a dealer sold a car stating it had done 20,000 miles
since an engine refit; the true figure was about 100,000. It was held this
was a term. The dealer "was in a position to know, or at least to find out,
the history of the car. He could get it by writing to the makers. He did not
do so. Indeed it was done later. When the history of this car was
examined, his statement turned out to be quite wrong. He ought to have
known better. There was no reasonable foundation for it."
 Reduction into Writing: Where the contract is consolidated into writing,
previous spoken terms, omitted from the consolidation, will probably be
relegated to representations.[10] The case of Birch v Paramount Estates
Ltd. (1956) provided that a very important spoken term may persist even

31. Types of Contractual Terms
 Types of contractual terms can be
conditions, warranties or innominate
terms.
 They may be expressed specifically in a
contract, implied by a general
understanding between the parties, or
implied by statute.
 Each provides remedies for an
aggrieved party in the event of a failure
of one party to fulfill their obligations of
the contract, although the extent of the
remedies vary upon the type of

32. Commercial Negotiation
 Commercial negotiation is the process by
which two parties with different agenda agree
on the price of the business transaction they
are involved in.
 It is marked by the communication of each
party's interests and what they are expecting
from the deal.
 Negotiations mean finding a leeway in the
other's list of demands and getting
themselves more elbow room.
 A negotiation becomes successful when each
side concurs with the other's needs.
 The agreement usually happens only if both
the sides find the deal has something in it for
them, that is, if the agreement is mutually
beneficial.
 This is a standard feature in all the business

33.  It is a deal gone awry if one side walks out
with all the benefits.
 In other words, it reflects the poor
negotiation skills of the losing team.
Commercial Negotiation Skills
 The negotiator has to possess specific
skills to talk their way out and cut an
excellent deal.
 For the better or for worse, the audacity of
a good negotiator lets them extract the
maximum juice out of a proposition.
 They have to work in the more extensive
interests of the company.
 Some of the skills that you need to
develop for engaging in commercial

34. Communication
 Without impressive communication skills,
you cannot survive on the battlefield for
long.
 If the negotiator lacks communication
skills, it is highly likely that the person will
let the other side have the more significant
share of the pie.
 Besides, it is not possible to convey your
ideas and objectives without effective
communication.
 A healthy and friendly conversation has to
transpire between the two sides for a quick
and mutually beneficial deal.

35. Confidence
 While in talks with an adversary to form a deal,
it is important to appear confident and self-
assured.
 It has a subtle psychological impact on the
people watching.
 To make someone buy your proposal you have
to sell it with conviction and confidence.
 The people who look like they know their stuff
will have more takers for their proffered deal.
 Also, speaking with elegance has an edge.
 If the negotiator fumbles for words, it will come
across as lack of confidence.
 As a result, the people who are engaging in the
deal might not feel comfortable getting
committed to the agreement.
 To gain the trust of the people at the other end
of the contract, the negotiator should look
competent and sure-footed.

36. Charisma
 While it is far-fetched to say that a person
negotiating can pull someone into a deal
just by appealing to them, it is true that the
charisma of the negotiator works in their
favour.
 It is not possible to charm someone into a
deal, but it is possible to win their hearts
and favour.
 The logic is pure and simple. If you can
create an impression on the minds of your
adversary and get into their good books, it
is likely that you can also influence their
decision and have them come around to

37. Thinking on one's feet
 Negotiations happen spontaneously. There is no
single way to do it. There is, of course, the theory
behind it.
 One can always think it through and do the
homework.
 But when on the field, things may not go exactly
as planned. Since, the person is on their own,
representing the company, she/he have to be on
their toes.
 Practices can bear no fruit if one fails to
improvise.
 One has to continually change tactics according
to the need of the moment and make it up as it as
one goes along.
 This is crucial as the weight of the company is on

38. Thinking ahead
 The person conducting the negotiations must always be a
few steps forward. It is essential for the person to have a
vision of the company's future and how important the
present deal is for that.
 It is necessary to have clarity of what one is looking to
achieve from the deal and how important it is to make it.
 This way, you can create the changes you want to bring. By
planning, the negotiator can decide on the strategies to
follow.
 While this may seem contrary to the improvising bit about
negotiations as mentioned above, the fact is that a
successful negotiation is a little bit of both.
 Besides these skills, one other thing that is common to all
successful negotiators is their conduct — behaviour towards
their opponent.
 The whole point of negotiations is to earn what is needed
respectfully, without getting into disputes or conflicts.
 Almost all the successful negotiators maintain a friendly
disposition and at least in the initial moments of their
conversation, focus more on the things they agree with
each other.

39. Importance of Commercial Negotiation
 To put it in a nutshell, negotiation skills are essential to keep your
business floating.
 It is only through active negotiations that one can take maximum
advantage of their adversary and make sure one is not taken advantage
of.
 Good negotiations, simply put, means good business. Here are some
ways in which good negotiations can prosper your business.
1. By getting a profitable deal from the suppliers. With negotiations, you can bargain
for lower costs of raw materials and products. This will, in turn, increase the
revenue and raise the profit of the business.
2. Negotiations set the stage for the future relationship between the two parties. It is
a binding which both the parties have conceded to. Therefore, it forms the basis
for resolving any dispute or conflict that unravels on their journey together.
3. The whole point of conducting negotiations is to win good contracts for the
company. Good contacts guarantee and protect the rights of the parties involved.
Also, it stands the test of time without raising any disinterest or conflicts.
4. While getting into an agreement, negotiations are the way to protect the
intellectual rights. Before sealing the deal, the two parties must clarify on the
ownership of the intellectual property rights so that no copyright infringement case
may surface in the days forward.
 Negotiations are one of the most important and the most difficult parts of
doing business. Negotiations involve influencing the other person's
decisions to suit one's own.
 It is no easy task. Moreover, it has the potential to make or break the
business. It can quickly go either way.
 Therefore, it is important not to lose one's ground while finalising a deal.

40.  There are a couple of things the negotiator must
keep in mind before entering into negotiations.
 These are the things she/he might need to
decide in prior.
 The first one being the in-depth knowledge of
one’s own business and that of the other’s and
chalking out plans to carry forward the mission.
 The second one is as important, which is to
devise contingency plans, that is, the path that
should be followed in case things are not going
as planned.
 If you are someone who wants to make a
difference to your company, commercial
negotiation skills should be developed and
honed at an early stage.
 This necessitates proper training and education.
 There is no shortage of higher education for
management in a country like India. It is all the
matter of finding the right courses

41. Source of personal power
 This is something that is more commonly heard in discussions
regarding international politics, war or sports.
 Seldom is this word used in sophisticated business discussions.
However, management does know that there are Five Sources of
power in an Organization.
 This article discusses each one of them in detail.
 Power is nothing but the possession of authority, influence and
certain skill over others.
 This power, depending on how effectively it is used, allows a
business to take a lead over its competition and carve a niche for
itself.
 Most of these type of powers are used to take control of the
employees reporting to you or to have a discipline and decorum
in an organization.
 Power does not mean a bad thing.
 Using power to right the wrong is in fact a beneficial process for
the organization. In fact, having power can lead to the right things
in life.
 A leader has the power to lead. A manager has the power to
analyse and implement things.

42.  An executive has the power to do things for his
company. Thus, there are many sources of
power and power is needed by everyone to get
the work done!
 In the year 1959, two American sociologists
Bertram Raven and John French
conceptualised this idea and categorized the
power into 5 sources.
 These are the same 5 sources of power which
are deeply imbibed in an organization.
 Five sources of power in an organization are;
1. Legitimate Power
2. Expert Power
3. Coercive Power
4. Referent power
5. Reward Power

43. Legitimate Power
 Legitimate power is also known as positional
power.
 As these names suggest, legitimate power is the
power that a person in the organization holds
because of his/her position and that is considered
to be legitimate.
 A manager who leads a team has certain
responsibilities and also the right to delegate
tasks/her to his subordinates as well as review their
work and give feedback.
 This power that a manager enjoys is because of
the position that he/she hols and is ‘legitimate
power.’ Job descriptions make it clear as to who an
employee will be reporting to and the team that the
employee will be leading, if any.
 For legitimate power to be respected in an
organization, the manager should be able and have
the experience, expertise and qualifications that the
job requires. Ex. CEO

44. Expert Power
 Again, as the name suggests, expert power is
that kind of power which an employee has due
to the knowledge and expertise that he/she
possesses. Knowledge is wealth in today’s
world and is highly sought after by
organizations.
 Nice specialisations and extensive research
work is highly valuable to businesses which are
increasingly becoming complicated and
specialised.
 Expert power also acts as a stepping stone for
employees to gain legitimate power.
 A good and acceptable display of expert power
will lead to promotions and make an employee
indispensable for the company.
 The promotions will result in legitimate or
positional power. Ex. Medico-Legal experts.

45. Coercive Power
 Coercive power is the power that a person has
which he/she uses to coerce or threaten other
employees.
 Coercive power is used to enforce strict
deadlines and punishable actions in the
workplace and scare employees.
 Salary cut, leave cut or even terminations are
certain threats that are used by bosses to get
the work done by their employees.
 Bosses need to be strict with their employees
and are justified in
expecting professionalism and timely
completion of work.
 Coercive power, if used optimally can improve
the performance of employees and make them

46. Referent power
 Referent power is power that is a
resultant of the personality of a person.
 The relationships that a person
develops with co-workers and the
charisma with which a person is able to
present himself/herself to others results
in a certain level of respect and
approachability towards that person.
 Referent power can also be a result of
closely knowing senior people in the
organization or those who are at a
position of leadership and authority of
any kind.

47. Reward Power
 Reward power arises out of the authority that a
person has to recognise and reward people.
 Ways to do this can be by salary hikes,
bonuses, paid leave, company sponsored
vacation or even promotions.
 Employees who possess reward power can
influence the performance of employees
considerably. Ad by Valueimpression
 If used, as a motivating factor, reward power
can make employees work harder and smarter
and contribute more effectively to the
organization.
 But if this is used in an unfavourable manner
and any kind of favouritism is displayed, then it
can severely harm the morale of employees
and reduce their productivity, leading to the
wastage of company resources. Ex. Power that
HR personnel have to decide CTC, bonus etc.

48.  Using these 5 sources of power,
employees, corporates and
businesses can motivate their
employees and have better
implementation of work.
 At the same time, co ordination
between departments, discipline and
decorum can all be achieved with the
proper use of the sources of power.

49. Organizational Power
 Organizational power is defined as the ability of the organization
structure to utilize all the mandatory resources in favor of
organization development such as man, machine and other
resources.
 Power is not uniformly distributed to all levels in the
organization; however, it is confined to certain departments or
groups of people depending on the level of responsibility and
seniority.
 The motive of assigning power to these levels is to streamline
the underlying activities by designing work structures, circulars,
policies, and their successful implementation for the success of
the organization.
 10 sources of power are;
1. Formal Power.
2. Legitimate Power.
3. Expert Power.
4. Referent Power.
5. Coercive Power.
6. Reward Power.
7. Informational Power.
8. Connection Power.
9. Political Power.

51. Formal Power
 Formal power is based on an individual’s position in an organization. Formal power can
come from the ability to coerce or reward, from formal authority, or the control of
information.
 The formal power is based on rank—for example, the fire chief or the captain.
Legitimate Power
 In the formal groups and organizations, probably the most frequent access to one or
more of the power bases is one’s structural position. This is called legitimate power.
 Legitimate power is also known as positional power. It’s derived from the position a
person holds in an organization’s hierarchy.
 Job descriptions, for example, require junior workers to report to managers and give
managers the power to assign duties to their juniors. For positional power to be
exercised effectively, the person wielding it must be deemed to have earned it
legitimately.
 An example of legitimate power is held by a company’s CEO.
Expert Power
 Expert power is influence wielded as a result of expertise, special skill, or knowledge.
Expert power is derived from possessing knowledge or expertise in a particular area.
 Such people are highly valued by organizations for their problem-solving skills.
 People who have expert power perform critical tasks and are therefore deemed
indispensable. The opinions, ideas, and decisions of people with expert power are held
in high regard by other employees and hence greatly influence their actions.
 Possession of expert power is normally a stepping stone to other sources of power such
as legitimate power.
 For example, a person who holds expert power can be promoted to senior management,
thereby giving him legitimate power.

52. Referent Power
 Referent power is based on identification with a person who has desirable resources or personal
traits.
 If I like, respect, and admire you, you can exercise power over me because I want to please you. It is
derived from the interpersonal relationships that a person cultivates with other people in the
organization.
 People possess reference power when others respect and like them. Referent power is also derived
from personal connections that a person has with key people in the organization’s hierarchy, such as
the CEO.
 It’s the perception of the personal relationships that she has that generates her power over
others. •
Coercive Power
 Coercive power is derived from a person’s ability to influence others via threats, punishments or
sanctions.
 A junior staff member may work late to meet a deadline to avoid disciplinary action from his boss.
Coercive power is, therefore, a person’s ability to punish fire or reprimand another employee.
 Coercive power helps control the behavior of employees by ensuring that they adhere to the
organization’s policies and norms.
Reward Power
 The opposite of coercive power is reward power. People comply with the wishes or directives of
another because doing so produces positive benefits; therefore, one who can distribute rewards that
others view as valuable will have power over those others.
 These rewards can be either financial – such as controlling pay rates, raises, and bonuses; or
nonfinancial – including merit recognition, promotions, interesting work assignments, friendly
colleagues, and preferred work shifts or sales territories.
 In an organization, people who wield reward power tend to influence the actions of other employees.
Reward power, if used well, greatly motivates employees.
 But if it’s applied through favoritism, reward power can greatly demoralize employees and diminish
their output.

53. Informational Power
 Informational power is where a person possesses needed or wanted information. It
comes from access to and control over information. This is a short-term power that
doesn’t necessarily influence or build credibility.
 For example, a project manager may have all the information for a specific project and
that will give him/her “informational power.”
 But it’s hard for a person to keep this power for long, and eventually, this information will
be released.
 This should not be a long-term strategy.
Connection Power
 It is where a person attains influence by gaining favor or simply acquaintance with a
powerful person.
 This power is all about networking. If I have a connection with someone that you want to
get to, that’s going to give me power.
 People employing this power build important coalitions with others. It is a natural ability
to forge such connections with individuals and assemble them into coalitions that give
him/her strong connection power.
Political Power
 This power comes from the support of a group. It arises from a leader’s ability to work
with people and social systems to gain their allegiance and support.
 It develops in all the state-owned organizations, especially when a certain political party
holds power and their supporters show power in many aspects in the organizations.
 By using political power, leaders can influence others and get some facilities from the
organization.

54. Charismatic Power
 Charismatic power is an extension of referent
power stemming from an individual’s personality
and interpersonal style.
 Charismatic leaders get others to follow them
because they can articulate an attractive vision,
take personal risks, demonstrate environmental and
follower sensitivity, and are willing to engage in
behavior that most others consider unconventional.
 But many organizations will have people with
charismatic qualities who, while not in formal
leadership positions, nevertheless can exert
influence over others because of the strength of
their heroic qualities.
 The above-mentioned bases/types of power are
normally practiced in many organizations.
 But, indeed, all the powers are not seen in a single
organization. The uses of powers vary organization
to organization, time to time, person to person,
situation to situation, etc.

55. Uses of power
 Power can be used by a variety of people in a variety of
ways.
 The table encompasses two related aspects; power bases,
requests from individuals possessing power and probable
outcomes as correlated in the form of prescriptions for the
manager, and general guidelines for the exercise of power.
 The three potential outcomes of a person’s attempted use
of power, as indicated in above depend on:
 The leader’s power base
 How that power base is operationalized; and
 Certain characteristics of the follower
 Commitment is the likely outcome when the follower
identifies with the leader and accepts the leader’s power
attempt.
 Compliance is probably the outcome when the subordinate
is willing to accept the leader’s desires, provided
acceptance does not require extra effort on the
subordinate’s part.
 Resistance is the usual outcome when the subordinate is
unwilling to comply and may even deliberately neglect to
ensure that the leader’s wishes are not realized.

56. Sources of
Leader
Influence
Types of outcome
Commitment Compliance Resistance
Referent Power Likely, if the
request is
believed to be
important to the
leader
Possible, if the
request is
perceived to be
unimportant to the
leader
Possible, if the
request is for
something that will
bring harm to the
leader
Expert Power Likely, if the
request is
persuasive and
subordinates
share the leader’s
task goals.
Possible, if the
request is
persuasive but the
subordinates are
apathetic about
task goals.
Possible, if the
leader is arrogant
and insulting, or the
subordinates
oppose task goals
Legitimate
Power
Possible, if the
request is polite
and very
appropriate.
Likely, if request or
order is seen as
legitimate
Possible, if arrogant
demands are made
or request does not
appear proper.
Reward Power Possible, if used
in a subtle, very
personal way.
Likely If used in a
mechanical,
impersonal way.
Possible If used in
a manipulative,
arrogant way.
Coercive Power Very unlikely Possible, if used in
a helpful, non-
punitive way
Likely, if used in a
hostile or
manipulative way.

57. Comparison of powers of suppliers
and purchasers
 Porter’s Five Forces analysis is a framework that
helps analyzing the level of competition within a certain
industry.
 It is especially useful when starting a new business or when
entering a new industry sector.
 According to this framework, competitiveness does not only
come from competitors.
 Rather, the state of competition in an industry depends on
five basic forces: threat of new entrants, bargaining power of
suppliers, bargaining power of buyers, threat of substitute
products or services, and existing industry rivalry.
 The collective strenght of these forces determines the profit
potential of an industry and thus its attractiveness. If the five
forces are intense (e.g. airline industry), almost no company
in the industry earns attractive returns on investments. If the
forces are mild however (e.g. softdrink industry), there is
room for higher returns. Each force will be elaborated on
below with the aid of examples from the airline industry to
illustrate the usage.

59. Threat of new entrants
 New entrants in an industry bring new capacity and the desire to gain
market share. The seriousness of the threat depends on the barriers to
enter a certain industry.
 The higher these barriers to entry, the smaller the threat for existing
players.
 Examples of barriers to entry are the need for economies of scale, high
customer loyalty for existing brands, large capital requirements (e.g.
large investments in marketing or R&D), the need for cumulative
experience, government policies, and limited access to distribution
channels.
 More barriers can be found in the table below.
Example
The threat of new entrants in the airline industry can be considered as low to medium.
It takes quite some upfront investments to start an airline company (e.g. purchasing
aircrafts). Moreover, new entrants need licenses, insurances, distribution channels
and other qualifications that are not easy to obtain when you are new to the industry
(e.g. access to flight routes). Furthermore, it can be expected that existing players
have built up a large base of experience over the years to cut costs and increase
service levels. A new entrant is likely to not have this kind of expertise, therefore
creating a competitive disadvantage right from the start. However, due to the
liberalization of market access and the availability of leasing options and external
finance from banks, investors, and aircraft manufacturers, new doors are opening for
potential entrants. Even though it doesn’t sound very attractive for companies to enter
the airline industry, it is NOT impossible. Many low-cost carriers like Southwest
Airlines, RyanAir and EasyJet have succesfully entered the industry over the years by
introducing innovative cost-cutting business models, thereby shaking up
original players like American Airlines, Delta Air Lines and KLM.

60. Bargaining power of suppliers
 This force analyzes how much power and control a company’s
supplier (also known as the market of inputs) has over the
potential to raise its prices or to reduce the quality of purchased
goods or services, which in turn would lower an industry’s
profitability potential.
 The concentration of suppliers and the availability of substitute
suppliers are important factors in determining supplier power.
 The fewer there are, the more power they have. Businesses are
in a better position when there are a multitude of suppliers.
 Sources of supplier power also include the switching costs of
companies in the industry, the presence of available substitutes,
the strength of their distribution channels and the uniqueness or
level of differentiation in the product or service the supplier is
delivering.
Example
The bargaining power of suppliers in the airline industry can be
considered very high. When looking at the major inputs that airline
companies need, we see that they are especially dependent on fuel and
aircrafts. These inputs however are very much affected by the external
environment over which the airline companies themselves have little
control. The price of aviation fuel is subject to the fluctuations in the
global market for oil, which can change wildly because of geopolitical
and other factors. In terms of aircrafts for example, only two major
suppliers exist: Boeing and Airbus. Boeing and Airbus therefore have
substantial bargaining power on the prices they charge.

61. Bargaining power of buyers
 The bargaining power of buyers is also described as the market of
outputs.
 This force analyzes to what extent the customers are able to put the
company under pressure, which also affects the customer’s sensitivity to
price changes.
 The customers have a lot of power when there aren’t many of them and
when the customers have many alternatives to buy from. Moreover, it
should be easy for them to switch from one company to another.
 Buying power is low however when customers purchase products in
small amounts, act independently and when the seller’s product is very
different from any of its competitors.
 The internet has allowed customers to become more informed and
therefore more empowered. Customers can easily compare prices
online, get information about a wide variety of products and get access to
offers from other companies instantly.
 Companies can take measures to reduce buyer power by for example
implementing loyalty programs or by differentiating their products and
services.
Example
Bargaining power of buyers in the airline industry is high. Customers are able to check
prices of different airline companies fast through the many online price comparisons
websites such as Skyscanner and Expedia. In addition, there aren’t any switching costs
involved in the process. Customers nowadays are likely to fly with different carriers to
and from their destination if that would lower the costs. Brand loyalty therefore doesn’t
seem to be that high. Some airline companies are trying to change this with frequent
flyer programs aimed at rewarding customers that come back to them from time to time.

62. Threat of substitute products
 The existence of products outside of the realm of the common product
boundaries increases the propensity of customers to switch to
alternatives.
 In order to discover these alternatives one should look beyond similar
products that are branded differently by competitors. Instead, every
product that serves a similar need for customers should be taken into
account.
 Energy drink like Redbull for instance is usually not considered a
competitor of coffee brands such as Nespresso or Starbucks.
 However, since both coffee and energy drink fulfill a similar need (i.e.
staying awake/getting energy), customers might be willing to switch from
one to another if they feel that prices increase too much in either coffee
or energy drinks.
 This will ultimately affect an industry’s profitability and should therefore
also be taken into account when evaluating the industry’s attractiveness.
Example
In terms of the airline industry, it can be said that the general need of its customers is
traveling. It may be clear that there are many alternatives for traveling besides going
by airplane. Depending on the urgency and distance, customers could take the train or
go by car. Especially in Asia, more and more people make use of highspeed trains
such as Bullet Trains and Maglev Trains. Furthermore, the airline industry might get
some serious future competition from Elon Musk’s Hyperloop concept in which
passengers will be traveling in capsules through a vacuum tube reaching speed limits
of 1200 km/h. Taken this altogether, the threat of substitutes in the airline industry can
be considered at least medium to high.

63. Rivalry among existing competitors
 This last force of the Porter’s Five Forces examines how intense the
current competition is in the marketplace, which is determined by the
number of existing competitors and what each competitor is capable of
doing.
 Rivalry is high when there are a lot of competitors that are roughly equal
in size and power, when the industry is growing slowly and when
consumers can easily switch to a competitors offering for little cost. A
good indicator of competitive rivalry is the concentration ratio of an
industry.
 The lower this ration, the more intense rivalry will probably be. When
rivalry is high, competitors are likely to actively engage in advertising
and price wars, which can hurt a business’s bottom line.
 In addition, rivalry will be more intense when barriers to exit are high,
forcing companies to remain in the industry even though profit margins
are declining. These barriers to exit can for example be long-term loan
agreements and high fixed costs.
Example
When looking at the airline industry in the United States, we see that the industry is
extremely competitive because of a number of reasons which include the entry of low
cost carriers, the tight regulation of the industry wherein safety become paramount
leading to high fixed costs and high barriers to exit, and the fact that the industry is
very stagnant in terms of growth at the moment. The switching costs for customers are
also very low and many players in the industry are similar in size (see graph below)
leading to extra fierce competition between those firms. Taken altogether, it can be
said that rivalry among existing competitors in the airline industry is high.

64. UNIT – II
COMMERCIAL &
CONTRACTUAL
AGREEMENTS

65. Legal issues for Commercial Agreement:
Who should the parties be?
 Anyone who has rights or obligations under the
contract should be a party.
 Sometimes parties are added to the contract who
have no rights or obligations under it and this is
generally a mistake: either the contract should
state what their rights or obligations are, or they
should not be parties to the contract at all.
 Where a company is part of a group of companies,
it is not always clear which member of that group
should perform the contractual obligations.
 Sometimes the parent company will be made a
contracting party, either
1. Instead of the subsidiary (with performance of the
contractual obligations being delegated or
subcontracted by the parent to the subsidiary), or
2. in addition to the subsidiary, and the parent will
undertake to guarantee performance of the contract
by the subsidiary.

66. Commencement, duration and extension of terms
 Sometimes contracts are signed after performance of the contractual
obligations has begun.
 It may, therefore, be necessary to have a different commencement date
to the date of signature of the contract.
 This should not be done by misstating the date of execution of the
agreement. Contracts are sometimes stated to be for a fixed term (eg
three years), with a right for each party to terminate on notice to the
other party (eg three months).
 The parties should ensure that it is clearly stated whether such notice
may be given
(a) at any time during the fixed term, or
(b) at any time after two years and nine months (so that the earliest termination is
after three years), or
(c) only after the fixed term has expired (so that the minimum term is, in effect, three
years and three months).
 If the contract also allows for termination on breach or insolvency, the
clause providing for the fixed term should be stated to be subject to the
clause(s) providing for earlier termination.
 Sometimes contracts are stated to be terminable only at fixed times (e.g
at a year end), and provided a minimum period of notice has been given.
Again, careful consideration is required.
 If the contract does not include any provisions for termination, then it
may be terminable on reasonable notice or it may not be terminable at
all.
 In view of these uncertainties, it may be highly desirable to include in the
contract a provision stating its duration or allowing a party to terminate

67. Main commercial obligations
 These obligations will be at the heart of the contract and will receive most attention
from the commercial parties.
 The contract should make clear what the obligations are and when they are to be
performed (and sometimes it may be necessary to state how, and where they are to
be performed).
Payment provisions
 If the price is a fixed amount, the payment clause will be relatively easy to draft. If it is
calculated by reference to a rate, for example, a rate per task, or for time spent or as
a percentage of sales revenue – as with patent royalties, this will generally require
more careful drafting.
 A number of secondary payment issues may also need to be addressed, including the
following:
◦ Does the price stated include VAT?
◦ When are payments to be made (if periodically, how frequently)?
◦ How are the payments to be made (by cheque, letter of credit, cash transfer,
etc)?
◦ Is interest payable on late payment?
◦ Is time of payment ‘of the essence’ i.e., is termination of the contract allowed
for late payment?
◦ The currency in which payments are to be made (in contracts with an
international element), any currency conversion method, and who bears any
exchange risk.
◦ Whether deductions or set-offs are allowed, including withholding of taxes
and avoiding double taxation (e.g., for royalty payments).
◦ Whether any payments are refundable or to be treated as an advance
against future payments.
◦ Who bears any ancillary costs, e.g., packing, carriage, insurance?
◦ Whether any statements, receipts or other documents are required to be
provided in support of payment claims.

68. Warranties
 Commercial contracts often include warranties, given by one or more
parties. The content of the warranties will vary from contract to
contract. Amongst the commercial issues to be considered are as
follows:
◦ Are you willing to give the warranty at all, or does it deal with something for
which you should not be responsible, or which the other party should check
for himself?
◦ If you are willing to give a warranty, should it be limited to matters within your
knowledge? There are two main types of knowledge warranty, as
demonstrated by the following examples:
1. X warrants that to the best of his knowledge, information and belief he
is not a party to any current legal proceedings.
2. X warrants that as far as he is aware, but without having conducted
any searches or investigations, he is not a party to any current legal
proceedings.
 With the former type of warranty, the court may consider that it is
implicit in the warranty that X has taken steps to establish the truth of
the warranted statement. In the latter example, it is made explicit that
this is not a part of the warranty being given.
 It is generally considered unwise merely to use the phrase ‘as far as he
is aware’ without an express disclaimer of investigations (or whatever
kind of disclaimer is appropriate to the warranty in question), as this
might be interpreted as a ‘best of knowledge’ type of warranty.
 It is common to exclude from the warranty matters formally disclosed to
the other party; such disclosures are often in a ‘disclosure letter’ which
is sent by the party giving the warranty to the other party at the time of
signing the agreement.

69.  With the former type of warranty, the court may
consider that it is implicit in the warranty that X has
taken steps to establish the truth of the warranted
statement.
 In the latter example, it is made explicit that this is
not a part of the warranty being given.
 It is generally considered unwise merely to use the
phrase ‘as far as he is aware’ without an express
disclaimer of investigations (or whatever kind of
disclaimer is appropriate to the warranty in
question), as this might be interpreted as a ‘best of
knowledge’ type of warranty.
 It is common to exclude from the warranty matters
formally disclosed to the other party; such
disclosures are often in a ‘disclosure letter’ which is
sent by the party giving the warranty to the other
party at the time of signing the agreement.
Sometimes, time limits or financial limits (lower or
upper limit) are agreed in relation to the bringing of
claims under the warranty.

70. Liability and Indemnities
 Liability and indemnity clauses can be viewed as
attempts to apportion commercial risks between the
contracting parties.
 The parties will often wish to consider whether,
commercially, those risks are acceptable, whether
they can be insured against at a reasonable price,
and whether the price to be paid under the contract
takes proper account of the risks being borne by
each party.
 Ultimately these are commercial rather than legal
issues, but they are often rather remote commercial
issues, which the parties’ lawyers may have spent
more time considering than their commercial
colleagues or clients.
 Moreover, the contractual language needed to deal
with such issues may of necessity be legalistic.
 Accordingly, this is an area where lawyers are often
asked to take the lead in contractual negotiations.

71. Legal issues for contractual agreements
Breach of Contract
 Each party to a contract has a duty to perform. If one party
performs, and the other party doesn't, the nonperforming party could
face legal consequences.
 Failure to perform under the contract amounts to a breach of the
contract.
 The non-breaching party can file a lawsuit against the other party to
recover damages. "Expectation damages" usually put the non-
breaching party in the position she would have been in had the
other party performed.
Level of Breach
 If someone entered a contract with you and breached the contract,
you must determine the type of breach that occurred. If it's a
material breach, you don't have to perform on your end of the
contract.
 A material breach happens when you don't receive the substantial
benefit of your bargain.
 For example, you enter a contract with a construction company to
build a restaurant.
 The construction company leaves a defect in the patio you
requested.
 This example represents a minor breach. You received the
substantial benefit of your bargain, the restaurant with a patio.

72. Conditions
 Some contracts provide conditions for performance.
 They may provide that a party doesn't have a duty to perform
unless a certain condition occurs.
 Therefore, nonperformance doesn't always equal a breach of
contract.
 For example, you might have a property-development business
and you contract to sell a building to another company on the
condition that the other company finds financing. If the other
company tries but fails to obtain financing, this cancels its duty
under the contract.
Statute of Frauds
 Certain types of contracts must satisfy the statute of frauds before
a court will enforce them.
 A contract satisfies the statute if the parties put the agreement in
writing.
 The person challenging the contract's validity must have signed it,
and the document must state the essential terms of the
agreement.
 The following contracts must satisfy the statute of frauds:
contracts that can't be performed within one year, those creating
an interest in land, an agreement for an estate executor or
administrator to pay a decedent’s debts, a contract for the sale of
goods for $500 or more, and a suretyship contract. If you enter
one of these contracts, put it in writing and make sure the other

73. Essentials of a Valid Contract
Major essentials of a valid contract are;
1. Offer
2. Acceptance
3. Consideration
4. Certainty
5. Capacity
Offer
 The first element in a valid contract would be offer.
 An offer or a promise or an agreement needs to be in contract because if
there is no offer than there will be no contract.
 In the Contracts Act, 1950, the first elements in a contract would be offer.
It is one of the elements to make sure that the contract is legally valid or
acceptable.
 In a contract, it is very important that a party would make an offer. There
is a difference of offer between an advertisement and an option.
 To make an offer, there should be at least two parties or even more so
that it would be legally capable of entering into a contract.
 If the offer is accepted than it would constitutes to a legally valid contract.
 When an offer is being made, the other party or person would know what
is being offer and what the person or party who made the offer expect to
have in return. It is the same when anybody goes on a holiday, stays at a
hotel and so on.
 For example, a family has made an arrangement with a tour agency to
have a holiday at Hong Kong for a few days. The tour agency would
make a contract by making forms to the family which would have to be
filling up. The family member who fills up the form would have to be clear
with the rules and regulations given by the tour agency company. Once it

75. Acceptance
 After having an offer in the contract, there should be
acceptance.
 For a contract to be made there should be acceptance from
the other party or person.
 When the other party is clear with the offer, there would
make an acceptance once they are clear with the rules and
regulations being offer in the contract.
 There will be no contract if the parties are still negotiating
or discussing and have not made accept the offer.
 The person or party can accept the offer being made in
writing or orally which is made verbally or being spoken
out. For example, a tourist writes to hotel K requesting
information about the cost and availability of
accommodation for the week commencing on the 15th April
2011.
 The staff at hotel K answers the inquiry states that the
accommodation available for that week would cost RM 600
and if the tourist responds with the deposit of RM 100
within a week, then the room will be allocated to him. If the
tourist accepts the offer, then the contract has been made
for the tourist and hotel K

76. Consideration
 Consideration is also a very important element in
the contract.
 Consideration in a contract would mean the other
person would be giving back something in return.
 It would be consider as an exchange which would
be made between the promisee and promissor.
 There should be consideration in a contract so that
it would be legally valid.
 For example, a customer in a fast food restaurant
like McDonalds orders a set lunch which costs
RM7.95. By ordering the set lunch, the customer is
agreeing to pay RM7.95 as consideration. However,
consideration does not give any threats to on ‘ line
holiday contracts. Holiday services which are being
provided by the on ‘ line holiday providers and also
the consideration by giving something back in
return which would be the payment money or even
the payment made by the holiday makers would
eventually follow the requirements for consideration

77. Certainty
 Another main element in a contract would be certainty.
 The terms and regulations being made in a contract should be
stated clearly and understood by the parties of the contract. If the
agreement is not certain, it would be no longer valid.
 For example, if the guest wants to stay in a hotel, , the guest
needs to inform how many days he or she is staying at the hotel,
the type of room, and also the date when he or she are going
stay and the number of days he or she is staying.
Capacity
 Capacity in a contract is the parties to the contract must have the
legal capacity to do so. 18 years old is stated as the age of a
major.
 Minors who are people below the age of eighteen have no
capacity to enter into contracts.
 Therefore, insane people or people with unsound minds also
cannot enter into any valid contracts.
 For example, a person who is at the age of sixteen years old
could not stay at a hotel. The hotel staff would not allow having
the person who is sixteen years old to stay at the hotel since that
person is not eighteen years old or above. For the person to stay
at the hotel, he or she must have a guardian who is above
eighteen years old or a parent to accompany him or her to stay in
the hotel.

78. Conclusion of the elements in a valid
contract
 Therefore it is important to have the
main elements in a contract.
 Only if there are all the main elements in
a contract then it would be legally valid
to make a contract.
 People should take precaution in making
a contract to make sure that the parties
would be in agreement with the terms
made in a contract.

79. Types of agreements
A One-Off Contract is a single stage process:
One Provider will be selected and the prices and the volume of 100% of the
work/goods/services to be delivered will be fixed.
Why are One-Off Contracts used?
One-off contracts are used where a Provider is only needed for a single
activity unlikely to be repetitive, and where the need of the Council of Europe
(CoE) is concrete and finite. A one-off contract can in most cases only be
concluded with a single Provider. Thus, the CoE is bound to receive goods,
services or works from that particular Provider.
Duration
A One-Off contract lasts “until completion of the obligations of the parties”. A
deadline (i.e. a given date, not a month) will be clearly stipulated for the
delivery of each deliverable.
Framework agreement
 In the context of negotiations, a framework agreement is an agreement
between two parties that recognizes that the parties have not come to a
final agreement on all matters relevant to the relationship between them,
but have come to agreement on enough matters to move forward with the
relationship, with further details to be agreed to in the future.
 In the context of procurement, a framework agreement is an agreement
between one or more businesses or organisations, "the purpose of which
is to establish the terms governing contracts to be awarded during a given
period, in particular with regard to price and, where appropriate, the
quantity envisaged“

80. Mini-Competition
 Mini – Competition means a competition between the qualified
service providers under the multi-vendor framework agreement for
the provision of services after the initial contract term or as
determined by the Contracting Authority
Call Off Contracts
 Public sector procurement has evolved from being conducted
solely through the simple process of individual tenders for
individual contracts. More and more public sector organisations
these days, are using “Framework Agreements.”
 A Framework Agreement is effectively a list of pre-qualified
suppliers who can bid for work around a certain group of goods
and/or services – typically having tendered for their place on the
framework.
 Framework agreements can last anywhere from a few months to
over a decade but typically last between 2 and 5 years.
Service Contract
 Service Contracts are agreements between a customer or client
and a person or company who will be providing services. For
example, a Service Contract might be used to define a work-
agreement between a contractor and a homeowner. Or, a contract
could be used between a business and a freelance web designer.
 Most often Service Contracts include details such as deadlines
and payment agreements. Contracts also usually define the work
to be performed and what process needs to take place if changes

81. Contract-to-Hire
 In a contract-to-hire arrangement, a staffing
agency and an employer agree upon a fixed
length of time for employment.
 At the end of the predetermined period, the
employer decides to either hire the
contractor as a permanent employee or the
contractor moves on to another opportunity.
Leased Asset
 A Leased Asset is an asset that is leased by
the owner to another party in return of
money or any other favor.
 While leasing an asset, the owner enters
into a contract allowing the other party the
temporary use of an asset.

82. UNIT – III
COMMERCIAL NEGOTIATION
IN RELATION TO SUPPLY
CHAIN

83. Conflict
 A process that begins when one party perceives that
another party has negatively affected or is about to
negatively affect something that the first party cares
about.
 Conflict is neither good or nor bad
 All unresolved conflict decreases productivity and
lowers performance
 To manage the conflicts in the organization is
termed as Conflict Management
Views Of Conflict
 Traditional View: The belief that all conflicts are
harmful and must be avoided
 Human relations view: Belief that conflict is a
natural and inevitable outcome in any group
 Integrationist view: Belief that conflict is not only a
positive force in group but that it is absolutely
necessary for a group to perform effectively

84. Sources of Conflict in a Workplace
 A typical workplace comprises of people from
different walks of life with various cultural
backgrounds, experiences, values, ethics, and
personalities; and where there is diversity, there
is bound to be a clash somewhere.
 Co-workers perceive their interests to be
incompatible.
 Because of their vast differences, they may feel
like the other party does not or refuses to see
and acknowledge their point of view, and that will
cause disagreement.
 Main sources of conflict are as follows:
1. Interpersonal Interactions
2. Organizational Structure
3. Change
4. External Factors

85. Interpersonal Interactions
◦ This mainly happens due to difference in
1. Personality
2. Cultural background
3. Moral values
4. Experiences
5. Misinterpretations
6. Language barriers
7. Communication skills
8. Individual ideas about personal success
◦ For Example: A young lawyer, just out of
college may feel an internal conflict with his
new role when his employer requires him to
cut his long hair and trade his casual clothes
for three piece suit

86. Organizational Structures
This mainly happens due to
 Office hierarchy
 Supervisors and employees might have different
ideas about work ethics and standards
 Supervisors can be overbearing and abusive of
their power that could upset employees
 If employees feel like they get more work than
their colleagues
 People might also become unhappy if they feel
that their tasks are not what they want or
expected to do
 Resource allocation: one department might feel
like another is given a bigger budget, or they get
more funds and equipment than the rest
 For Example: Employees who depend on tips or
commissions are likely to face greater levels of
organisational conflict because they have even

87. Change
 A change in the managerial team, team
shuffles, downsizing and company
reorganization will disrupt employees’
usual routine and work life
 Change in a company cause a lot of
confusion and stress among workers
 Using or installing new technology is
usually complicated and it takes time to
adjust to
 If employees do not support the
implementation of unfamiliar tools and
methods.

88. External Factors
 Economic factors such as recession,
changing markets and industry competition
can cause struggle within an organization
 In times of bad economy, employees would
assume that they have to work more to
catch up with the company’s problems and
benefits may be cut to cover the costs of
operations
 The government, stakeholders and other
groups can create pressure for an
organization and affect the way it operates
 For Example: If goods are not delivered on
time, it will affect customer service and
cause problems between the company and
its customers

89. Team management in commercial negotiation
 It’s not surprising that negotiating teams wrestle with
internal conflicts.
 After all, companies send teams to the negotiating table
only when issues are political or complex and require input
from various technical experts, functional groups, or
geographic regions.
 Even though team members are all technically on the same
side, they often have different priorities and imagine
different ideal outcomes: Business development just wants
to close the deal.
 Finance is most concerned about costs. The legal
department is focused on patents and intellectual property.
 Teams that ignore or fail to resolve their differences over
negotiation targets, trade-offs, concessions, and tactics will
not come to the table with a coherent negotiation strategy.
 They risk ending up with an agreement that’s good for one
part of the company but bad for another.
 On the basis of our research, we recommend four
techniques for managing conflicts of interest within the
team.

90. Plot out the conflicts.
 Confronting diverging interests helps clarify team goals,
uncover personality conflicts, and ultimately build unity of
purpose.
 Many managers examine competing interests by creating a
matrix of the issues that need to be addressed. For each
issue, they plot out their own priorities and position, as well
as what they think are the priorities and positions of each of
the other team members.
 Consider the team whose conflicts of interest are
represented in the exhibit “What Does This Team Want?”
The general manager would like her company to earn more
profit.
 The product manager is concerned that a price increase will
erode market share.
 The sales representative is bent on preserving his account
relationship no matter what the cost is. And the business
manager wants to increase customer support so that his
department will get more work.
 By plotting out each element up for negotiation, team
members can recognize the internal trade-offs they must
make before they can coalesce around the highest-margin
proposal.

91. Work with constituents.
 Underlying many conflicts of interest is the simple fact that members represent different
constituencies within the organization.
 People don’t want to let their departments down, so they dig in on an issue important to
their constituents that might not be in the best interest of the whole company. If
constituents are presented with all the facts, however, they might be willing to concede
more ground because they’ll also see the bigger picture.
 To help get everyone on board with a single negotiation strategy, some leaders deliberately
assemble teams that contain only individuals good at forming relationships across
constituencies. Managers who don’t have the luxury of choosing their team members,
though, might have to go an extra mile to engage those constituencies themselves. One
way is to invite important opinion leaders or decision makers to attend team planning
sessions.
 Alternatively, team managers might have to embark on multiple rounds of bargaining with
constituent departments. One manager described the many times he went back and forth
between the customer service department, the program managers, and the engineers.
He’d say, “OK, we need you to move a little bit more and get your number down a little bit
more. We are close—just come this little extra bit.”
 If those approaches fail, you can engage in reality testing. To illustrate the dangers of not
working together to make a deal happen, for instance, one leader sent his team members
back to their own departments with the worst-case outcome for the company and individual
units. This sobering hypothetical softened up hard-liners and allowed members to align
their interests.
 Finally, some companies have a formal structure in place to support negotiating teams: If
deals involve strategic decisions that affect multiple divisions, a corporate coordinator
(often a C-level executive) who has the formal power to get constituencies to fall in line
joins the team.
 Whatever tactics you choose, know that you cannot skip this step. If your team’s members
lack the authority or political clout to unilaterally commit their part of the organization to the
negotiating strategy, you must somehow get all constituencies on board before you get to
the table.

92. Mediate conflicts of interest.
 If, despite best efforts, the team cannot
reconcile its differences, the best approach may
be mediation, led by either a team member or
an outside facilitator.
 The mediator acts as a buffer of sorts. One
manager described his team’s experience like
this: “You’ve got team members who are
extremely competitive, who want to win and are
afraid to show weakness.”
 The team member acting as mediator explained
that he heard their concerns and their goals,
told them where other teammates were coming
from, and asked questions like, “Can you just
kind of talk through this a little bit? Why do you
guys need to be here, and why are you afraid to
have that dialogue?” In other words, he applied
the classic across-the-table negotiation strategy
of asking “why” and “why not” questions to the

93. Persuade with data.
 The fact that team members don’t have access to the same data
is often the root of conflicts of interest. In our research, leaders
found that their members were understandably unwilling to
commit time and resources to the negotiating team until they saw
facts and figures that clearly demonstrated the effect their efforts
would have on their departments.
 Unfortunately, the obvious solution—give people more data—is
not as easy as it sounds. Individuals are likely to distrust data that
come from other departments, suspecting the information to be
biased and self-serving. One company solved that problem by
assigning a small task force from within the team to jointly analyze
the data provided by each department.
 Other companies brought in an outside consultant to gather and
analyze the data. An experienced consultant told us how explicit
details relating to the purchase of hospital equipment helped one
team decide on a strategy.
 “Physicians feel like they’re generating revenue for the hospital,
and therefore the hospital should be able to provide the
equipment and products that the physician wants,” the consultant
explained. “What they’re surprised to see is that a lot of times the
hospital actually loses money on every procedure that’s done in
their group. Sharing that information with the physician is an eye-
opener. So when we put the whole package together for the
physicians across groups, they were more likely to understand
and be willing to work with the hospital.”

94. Implementing a Shared Strategy
 Gaffes made at the bargaining table are usually the result
of genuine differences in participants’ negotiation styles, a
lack of preparation, or frustration.
 Although rarely intentional, breakdowns in discipline
sabotage a team’s strategy in ways that are almost
impossible to recover from. Such breakdowns reveal
fissures that the other party eagerly exploits.
 Our interviews uncovered many examples of undisciplined
behavior. Sometimes team members get emotional and
become irrationally intransigent toward the other side,
revealing information that jeopardizes a position or exposes
a weakness.
 Sometimes the reverse happens, and an overeager team
member says, “We can do that”—without asking for a
reciprocal concession.
 Interpersonal conflicts can contribute to these problems.
We heard of many teams that struggled internally with
defensive posturing, perceived arrogance, and clashes
about appropriate negotiation styles.
 Emotional and personal differences can make people
unpredictable and difficult to align with the agreed-upon
strategy.

95. Simulate the negotiation.
 To head off surprises at the table, savvy teams role-play
ahead of time aspects of the negotiation that they expect to
be contentious.
 Team members who have prior negotiation experience with
the other party can be especially valuable.
 One manager asks his teammates “to throw out objections,
so that you’re able to figure out, ‘OK, if they throw that one
at me, who is going to respond to it, and what is the
response going to be?’”
 Rehearsals like that enable individuals to determine when
they should contribute—and when they should keep silent.
They help people anticipate their own and others’ likeliest
emotional responses, predict where team discipline might
break down, and clarify who has authority to make
concessions and decisions.
 Role playing takes time, however, and requires extensive
knowledge of the other side in order to make accurate
predictions. If your team lacks either of those requirements,
focus instead on the next two negotiating tactics.

96. Approaches for commercial negotiation
 There are 3 different approaches to negotiation and the
outcome of the negotiation depends on the approach. The
various approaches to negotiation are as follows:
1. Distributive Negotiation or Win-Lose Approach
2. Lose-Lose Approach
3. Integrative Negotiation or Win-Win Approach
Distributive Negotiation or Win-Lose Approach
 This is also called competitive, zero sum, or claiming value
approach.
 This approach is based on the premise that one person can
win only at the expense of the other.
 It has the following characteristics:
i. One side ‘wins’ and one side ‘loses’.
ii. There are fixed resources to be divided so that the more
one gets, the less the other gets.
iii. One person’s interests oppose the other’s.
iv. The dominant concern in this type of bargaining is usually
to maximize one’s own interests.
v. The dominant strategies in this mode include
manipulation, forcing and withholding information.

97.  Strategy to be used: In this mode, one seeks to
gain advantage through concealing information,
misleading or using manipulative actions.
 Of course, these methods have serious
potential for negative consequences.
 Yet even in this type of negotiation, both sides
must feel that at the end the outcome was the
best that they could achieve and that it is worth
accepting and supporting.
 The basic techniques open to the negotiator in
this kind of approach are the following:
◦ Influence the other person’s belief in what is
possible.
◦ Learn as much as possible about the other
person’s position especially with regard to
resistance points.
◦ Try to convince the other to change his/her mind
about their ability to achieve their own goals.
◦ Promote your own objectives as desirable,

98. Lose-Lose Approach
 This negotiation approach is adopted when
one negotiating partner feels that his own
interests are threatened and he does all he
can to ensure that the outcome of the
negotiation is not suitable to the interests of
the other party as well.
 In the bargain, both the parties end up
being the loser.
 This type of situation arises when the
negotiating partners ignore one another’s
needs and the need to hurt each other
outweighs the need to find some kind of an
acceptable solution.
 This is the most undesirable type of
outcome and hence this negotiation
approach is best avoided.

99. Integrative Negotiation or Win-Win
Approach
 This negotiation approach is also called as
collaborative or creating value approach. It
is superior to all negotiation approaches.
 It results in both the parties feeling that they
are achieving what they wanted.
 It results in satisfaction to both the parties.
 It has the following characteristics.
1. There are a sufficient amount of resources to
be divided and both sides can ‘win’
2. The dominant concern here is to maximize
joint outcomes.
3. The dominant strategies include cooperation,
sharing information, and mutual problem-
solving. This type is also called ‘creating value’
since the goal here is to have both sides leave
the negotiating feeling they had greater value

100.  Since the integrative approach is most desirable,
some of the guidelines to integrative bargaining are
listed below:
◦ Orient yourself towards a win-win approach. Your attitude
while going into negotiation plays a huge role in the
outcome.
◦ Plan and have a concrete strategy. Be clear on what is
important to you and why it is important.
◦ Know your Best Alternative to a Negotiated Alternative
(BATNA).
◦ Separate people from the problem.
◦ Focus on interests, not positions; consider the other
party’s situation.
◦ Create options for mutual gain.
◦ Generate a variety of possibilities before deciding what to
do.
◦ Aim for an outcome based on some objective standard.
◦ Pay a lot of attention to the flow of negotiation.
◦ Take the intangibles into account, communicate carefully.
◦ Use active listening skills, rephrase and ask questions
and then ask some more

101. UNIT – IV
COST & PRICES IN
COMMERCIAL
NEGOTIATION

102. Types of Costs
Direct Cost
 A direct cost is a price that can be directly tied to the production
of specific goods or services.
 A direct cost can be traced to the cost object, which can be a
service, product, or department.
 Direct and indirect costs are the two major types of expenses
or costs that companies can incur.
 Direct costs are often variable costs, meaning they fluctuate
with production levels such as inventory. However, some costs,
such as indirect costs are more difficult to assign to a specific
product.
 Examples of indirect costs include depreciation and
administrative expenses.
 Any cost that's involved in producing a good, even if it's only a
portion of the cost that's allocated to the production facility, are
included as direct costs.
 Some examples of direct costs are listed below:
◦ Direct labor
◦ Direct materials
◦ Manufacturing supplies
◦ Wages for the production staff
◦ Fuel or power consumption

103. Indirect Cost
 Indirect costs are, but not necessarily, not directly attributable to a cost
object. It should be financially infeasible to do so.
 Indirect costs are typically allocated to a cost object on some basis. In
construction, all costs which are required for completion of the installation,
but are not directly attributable to the cost object are indirect, such as
overhead. In manufacturing, costs not directly assignable to the end
product or process are indirect.
 These may be costs for management, insurance, taxes, or maintenance,
for example.
 Indirect costs are those for activities or services that benefit more than one
project. Their precise benefits to a specific project are often difficult or
impossible to trace.
 For example, it may be difficult to determine precisely how the activities of
the director of an organization benefit a specific project. Indirect costs do
not vary substantially within certain production volumes or other indicators
of activity, and so they may sometimes be considered to be fixed costs
 Costs usually allocated indirectly
◦ Indirect costs related to transport
◦ Administration cost
◦ Selling & distribution cost
◦ Office cost
◦ Security cost
◦ Shipping and Postage
◦ Utilities and rent

104. Fixed Cost
 A fixed cost is a cost that does not change with
an increase or decrease in the amount of goods
or services produced or sold.
 Fixed costs are expenses that have to be paid by
a company, independent of any specific business
activities.
 In general, companies can have two types of
costs, fixed costs or variable costs, which
together result in their total costs. Shutdown
points tend to be applied to reduce fixed costs.
 The costs which don’t vary with changing output.
 Fixed costs might include the cost of building a
factory, insurance and legal bills.
 Even if your output changes or you don’t produce
anything, your fixed costs stay the same

105. Variable Cost
 Costs which depend on the output produced. For example, if
you produce more cars, you have to use more raw materials
such as metal. This is a variable cost.
 A variable cost is a corporate expense that changes in
proportion to production output. Variable costs increase or
decrease depending on a company's production volume;
they rise as production increases and fall as production
decreases.
 Examples of variable costs include the costs of raw
materials and packaging.
 A variable cost can be contrasted with a fixed cost.
 The total expenses incurred by any business consist of fixed
costs and variable costs.
 Variable costs are dependent on production output.
 The variable cost of production is a constant amount per unit
produced. As the volume of production and output increases,
variable costs will also increase.
 Conversely, when fewer products are produced, the variable
costs associated with production will consequently decrease.

106. Break - Even – Analysis
 Break Even Analysis in economics, business, and cost accounting refers to the point in which total
cost and total revenue are equal.
 A break even point analysis is used to determine the number of units or dollars of revenue needed
to cover total costs (fixed and variable costs).
Formula for Break Even Analysis
 The formula for break even analysis is as follows:
Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)
 Where:
◦ Fixed costs are costs that do not change with varying output (e.g., salary, rent, building
machinery).
◦ Sales price per unit is the selling price (unit selling price) per unit.
◦ Variable cost per unit is the variable costs incurred to create a unit.
 It is also helpful to note that sales price per unit minus variable cost per unit is the contribution
margin per unit.
 For example, if a book’s selling price is $100 and its variable costs are $5 to make the book, $95
is the contribution margin per unit and contributes to offsetting the fixed costs.
Example of Break Even Analysis
 Colin is the managerial accountant in charge of Company A, which sells water bottles. He
previously determined that the fixed costs of Company A consist of property taxes, a lease, and
executive salaries, which add up to $100,000. The variable cost associated with producing one
water bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the
break even point of Company A’s premium water bottle:
Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)
Break even quantity = $100,000 / ($12 – $2) = 10,000
 Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A

108. Explanation
1. The number of units is on the X-axis (horizontal) and the
dollar amount is on the Y-axis (vertical).
2. The red line represents the total fixed costs of $100,000.
3. The blue line represents revenue per unit sold. For
example, selling 10,000 units would generate 10,000 x
$12 = $120,000 in revenue.
4. The yellow line represents total costs (fixed and variable
costs). For example, if the company sells 0 units, then the
company would incur $0 in variable costs but $100,000 in
fixed costs for total costs of $100,000. If the company
sells 10,000 units, the company would incur 10,000 x $2 =
$20,000 in variable costs and $100,000 in fixed costs for
total costs of $120,000.
5. The break even point is at 10,000 units. At this point,
revenue would be 10,000 x $12 = $120,000 and costs
would be 10,000 x 2 = $20,000 in variable costs and
$100,000 in fixed costs.
6. When the number of units exceeds 10,000, the company
would be making a profit on the units sold. Note that the
blue revenue line is greater than the yellow total costs line
after 10,000 units are produced. Likewise, if the number of

109. Cost-Volume-Profit Analysis
 Cost-volume-profit (CVP) analysis is used to determine how changes in
costs and volume affect a company's operating income and net income.
 In performing this analysis, there are several assumptions made, including:
◦ Sales price per unit is constant.
◦ Variable costs per unit are constant.
◦ Total fixed costs are constant.
◦ Everything produced is sold.
◦ Costs are only affected because activity changes.
◦ If a company sells more than one product, they are sold in the same mix.
 CVP analysis requires that all the company's costs, including manufacturing,
selling, and administrative costs, be identified as variable or fixed.
Contribution margin and contribution margin ratio
 Key calculations when using CVP analysis are the contribution margin and
the contribution margin ratio.
 The contribution margin represents the amount of income or profit the
company made before deducting its fixed costs.
 Said another way, it is the amount of sales dollars available to cover (or
contribute to) fixed costs.
 When calculated as a ratio, it is the percent of sales dollars available to
cover fixed costs. Once fixed costs are covered, the next dollar of sales

110.  The contribution margin is
sales revenue minus all
variable costs.
 It may be calculated using
dollars or on a per unit basis.
 If The Three M's, Inc., has
sales of $750,000 and total
variable costs of $450,000, its
contribution margin is
$300,000. Assuming the
company sold 250,000 units
during the year, the per unit
sales price is $3 and the total
variable cost per unit is $1.80.
The contribution margin per
unit is $1.20.
 The contribution margin ratio
is 40%. It can be calculated
using either the contribution
margin in dollars or the
contribution margin per unit.
 To calculate the contribution
margin ratio, the contribution
margin is divided by the sales
or revenues amount.

111. Break-even point
 The break‐even point represents the level of sales where net income
equals zero. In other words, the point where sales revenue equals total
variable costs plus total fixed costs, and contribution margin equals fixed
costs. Using the previous information and given that the company has
fixed costs of $300,000, the break‐even income statement shows zero
net income

112.  This income statement format is known as the contribution margin
income statement and is used for internal reporting only.
 The $1.80 per unit or $450,000 of variable costs represent all variable
costs including costs classified as manufacturing costs, selling
expenses, and administrative expenses. Similarly, the fixed costs
represent total manufacturing, selling, and administrative fixed costs.
 Break‐even point in dollars. The break‐even point in sales dollars of
$750,000 is calculated by dividing total fixed costs of $300,000 by the
contribution margin ratio of 40%.
 Another way to calculate break‐even sales dollars is to use the
mathematical equation.

113.  In this equation, the variable costs are stated as a percent of
sales. If a unit has a $3.00 selling price and variable costs of
$1.80, variable costs as a percent of sales is 60% ($1.80 ÷
$3.00). Using fixed costs of $300,000, the break‐even equation
is shown below.
 The last calculation using the mathematical equation is the same
as the break‐even sales formula using the fixed costs and the
contribution margin ratio previously discussed in this chapter.