Question

You are the director of international operations for North and South America for Lenovo.  In 2015 you developed a five-year marketing plan to aggressively market personal computers in Canada, Mexico and Brazil.  A key element of your plan called for meeting the competitive prices of HP and local manufacturers every step of the way.  In addition you planned to spend heavily on marketing.  Your yearly budget for marketing in the major target markets was set as follows:

Canada C$ 2,000,000

Mexico Pesos   5,000,000

Brazil Reals 1,000,000

Your 2015 price set in U.S.$ for your top selling laptop was $2,000 in each market. Market prices have declined 20% on a U.S$ basis over the years.

1.      What do your marketing budgets look like in 2015 and today in US$?

2.      What do the computer prices look like in local currencies in 2015 and today?

3.     What actions would you plan to take in each market to fulfill your goals while  

addressing current conditions? (Hint: look at the marketing expenditures and the prices together).

CURRENCY PROBLEM 2                           

You are the director of U.S. operations for Nissan.  In 2015, you developed plans for a new sports truck model, the Nissan Minimax to be sold at $30,000.  This model can be made in both the U.S. and Japan.  Gross margin (meaning margin after all direct costs) is approximately 50%.

1.         What is the cost of the Minimax to Nissan if it is made in

            Japan vs. made in the U.S. in 2015 and 2020, assuming

            no inflation?

2.         What actions would you recommend to the home office in

            Tokyo to address the current situation?

SPOT RATES FOR CURRENCY EXERCISE   

Country                       Spot Rates (3-11-15)                          Spot Rates (3-11-20)

Canada C$ 0.7683    0.7282

Mexico pesos 0.0646                                                 0.0474

Brazil  reals 0.3315 0.2133

Japan   yen                       0.0083 0.0095

Answer 1

Problem 1:

=> Formula for conversion of Local Currency into US$ = Amount in other currency* Spot Rate at that point of time.

1) Marketing Budgets in US$ in 2015

=> Canada = Amount in Canadian Dollars* Spot Rate in 2015

=> 2,000,000*.7683 = $1,536,600

=> Mexico = Amount in Mexican Pesos* Spot Rate in 2015

=> 5,000,000*.0646 = $323,000

=> Brazil = Amount in Brazil Reals* Spot Rate in 2015

=> 1,000,000*.3315 = $331,500

Marketing Budgets in US$ in 2020

=> Canada = Amount in Canadian Dollars* Spot Rate in 2020

=> 2,000,000*.7282 = $1,456,400

=> Mexico = Amount in Mexican Pesos* Spot Rate in 2020

=> 5,000,000*.0474 = $237,000

=> Brazil = Amount in Brazil Reals* Spot Rate in 2020

=> 1,000,000*.2133 = $213,300

We have shown the marketing budgets in Tabular form for ease of understanding:

Countries	Marketing Budgets in 2015 (US$)	Marketing Budgets in 2020 (US$)
Canada	1,536,600	1,456,400
Mexico	323,000	237,000
Brazil	331,500	213,300

2) Formula for conversion of US$ into Local Currency= Amount in US$ / Spot Rate at that point of time.

Computer Prices in Local Currency in 2015:

Canada: Amount in US$ / Spot Rate in 2015

=> 2,000/.7683 = C$2603

Mexico: Amount in US$ / Spot Rate in 2015

=> 2,000/.0646= 30,960 Mexican Pesos

Brazil: Amount in US$ / Spot Rate in 2015

=> 2,000/.3315= 6,033 Brazil Reals

Computer Prices in Local Currency in 2020:

Prices in US$ in 2020 => (1-Decline %) * Prices in 2015 => (1-20%)*$2000 => 80%*2,000 => $1,600

Canada: Amount in US$ / Spot Rate in 2020

=> 1,600/.7282 = C$2,197

Mexico: Amount in US$ / Spot Rate in 2020

=> 1,600/.0474= 33,755 Mexican Pesos

Brazil: Amount in US$ / Spot Rate in 2020

=> 1,600/.2133= 7,501 Brazil Reals

Computer Prices in 2015 and 2020 in Tabular Form is given below:

Countries	Prices of Computer in 2015 (Local Currency)	Prices of Computer in 2015 (Local Currency)
Canada	C$2,603	C$2,197
Mexico	30,960 Mexican Pesos	33,755 Mexican Pesos
Brazil	6,033 Brazil Reals	7,501 Brazil Reals

3) Actions that can be taken in each market to fulfill goals:

Canada: As the prices have come down in Local Currency from C$2,603 in 2015 to C$2,197 in 2020, the marketing budgets should be reduced so that Profits Margin don't decline.

Mexico: Prices have gone up in Local Currency terms from 30,960 Mexican Pesos in 2015 to 33,755 Mexican Pesos in 2020 (~9% increase) , we can keep the Marketing Budgets at the same level or can increase it a little to generate more revenue.

Brazil: Prices have gone up in Local Currency terms from 6,033 Brazil Reals in 2015 to 7,501 Brazil Reals in 2020 (~24.3% increase) , we can increase the marketing Budgets to generate more revenue and profits.

Currency Problem 2:

1.) Cost of Minimax if it is made in US in 2015 and 2020 = Selling Price - Gross Margin

= $30,000 - 50%*$30,000 => 30,000 - 15,000 => US$15,000

Cost of Minimax to Nissan if it is made in Japan in 2015 = Cost in US$ / Spot Rate in 2015

= 15,000 / .0083 => 1,807,229 Japanese Yen

Cost of Minimax to Nissan if it is made in Japan in 2020 (assuming no inflation) = 1,807,229 Japanese Yen.

  Cost of Minimax to Nissan if it is made in Japan in 2020 (assuming no inflation) in US$ = Cost in Japanese Yen* Spot Rate in 2020 => 1,807,229 * .0095 => US$ 17,169

Made in	Cost in 2015 ($)	Cost in 2020 ($)
US	15,000	15,000
Japan	15,000	17,169

2.) I would recommend the home office in Tokyo to make Minimax in US, as with depreciating Japanese Yen, the Direct Cost has gone up from $15,000 in 2015 to $17,169 in 2020 (~14.5% increase), As the Selling Price will not go up (assuming no inflation), and will remain constant at $30,000, the Gross Margin will fall from $15,000 in 2015 to $12,831 in 2020 (~14.5% decrease).