Question

Murray Exports (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $24,000 each. The Chinese yuan (renminbi) has been trading at Yuan8.20/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan9.00/$, after which it will remain at that rate for the foreseeable future. Based onthis forecast, Murray Exports faces a pricing decision in the face of the impending devaluation. It may either (1) maintain the same yuan price and in effect sell for fewer dollars, in which case Chinese volume will not change; or (2) maintain the same dollar price, raise the yuan price in China to offset the devaluation, and experience a 10% drop in unit volume. In both cases, direct costs per unit are 75% of the current U.S. sales price of $24,000.
A. What would be the short-run(one-year) impact of each pricing stragety?
B. Which do recommend?

Answer 1

Answer:

Murray Exports (U.S.)

A. The short-run impact of each pricing strategy is as follows:

                                            Alternative 1                    Alternative 2

                              Reduce Price to $21,867    Maintain Price at $24,000

Gross profit                         $38,670,000               $54,000,000

Reduction in Gross Profit   $21,330,000                 $6,000,000

B.  (2) maintain the same dollar price of $24,000, raise the yuan price in China to Yuan 216,000 per unit to offset the devaluation, and experience a 10% drop in sales unit volume.  

 

Explanation:

a) Data and Calculations:

Current exchange rate = Yuan 8.20/US$

Current exports of heavy crane equipment per year to China = 10,000

US unit price of printer in dollars = $24,000

Chinese unit price of crane equipment in Yuan equivalent = Yuan 196,800 ($24,000 * Yuan 8.20)

Unit price of crane equipment in Chinese Yuan when the currency is devalued = Yuan 216,000 ($24,000 * Yuan 9.00)

The reduced dollar price with devaluation, when Yuan price is maintained = $21,867 (Yuan 196,800/9.00)

Before Devaluation of Chinese Yuan:

Sales volume            10,000

Sales revenue $240,000,000 (10,000 * $24,000)

Direct costs        180,000,000 (10,000 * $18,000) (75% of $24,000)

Gross profit       $60,000,000

                             Alternative 1                         Alternative 2

                       Reduce Price to $21,867    Maintain Price at $24,000

Sales volume                10,000 units             9,000 (10,000 * 90%) units

Sales revenue      $218,670,000             $216,000,000 ($24,000 * 9,000)

Direct costs            180,000,000               162,000,000 ($18,000 * 9,000)

Gross profit           $38,670,000               $54,000,000 ($6,000 * 9,000)

Direct costs = $180m ($18,000 * 10,000)  = $162m ($18,000 * 9,000)