Question

Operating exposure. ​ Copy-Cat, Inc. has signed a deal to make vintage Nissan​ 240-Z sports cars for the next three years. The company will build the cars in Japan and ship them to the United States for sale. The current indirect rate is ¥114.0659 per dollar. The anticipated inflation rate for parts and labor in Japan is 2.4​%over the next three​ years, and the anticipated overall inflation rate for Japan is 3.4​%over the next three years. The expected overall inflation rate in the United States is 4.7% over the next three years. ​ (The stated rates are on an annual​ basis.) If​ Copy-Cat plans to sell 600 cars a year at an initial price of $40,000 and the cost of production is ¥4,076,500​, what is the annual profit in dollars for​ Copy-Cat? Assume it takes one year for production and all sales revenues and production costs occur at the end of the year. Is this profit rising or falling each​ year? ​ Why?

What is the expected sales revenue per car in dollars for​Copy-Cat in year​ 1?

​$ (Round to the nearest​ cent.)

What is the expected sales revenue per car in dollars for​Copy-Cat in year​ 2?

​$​(Round to the nearest​ cent.)

What is the expected sales revenue per car in dollars for​Copy-Cat in year​ 3?

​$​(Round to the nearest​ cent.)

What is the expected production cost per car in dollars for​Copy-Cat in year​ 1?

​$(Round to the nearest​ cent.)

What is the expected production cost per car in dollars for​Copy-Cat in year​ 2?

​$​(Round to the nearest​ cent.)

What is the expected production cost per car in dollars for​Copy-Cat in year​ 3?

​$(Round to the nearest​ cent.)

What is the expected profit in dollars for​ Copy-Cat in year​ 1? Enter a negative number for a loss.

​$​(Round to the nearest​ dollar.)

What is the expected profit in dollars for​ Copy-Cat in year​ 2? Enter a negative number for a loss.

​$​(Round to the nearest​ dollar.)

What is the expected profit in dollars for​ Copy-Cat in year​ 3? Enter a negative number for a loss.

​$(Round to the nearest​ dollar.)

Will these new anticipated inflation rates affect the production of vintage​ 240-Zs? ​ Why?  ​(Select the best​ response.)

A. The profit​ (loss) is rising​ (falling) each year as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar.

B. The profit​ (loss) is falling​ (rising) each year as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar.

C. The profit​ (loss) is falling​ (rising) each year as the yen is weakening against the dollar despite different inflation rates in the two countries.

D. The profit​ (loss) is rising​ (falling) as the revenue is growing at a higher inflation rate than the production costs and the weakening yen against the dollar allows for the production costs to fall even more.

Answer 1

Answers:

What is the expected sales revenue per car in dollars for​Copy-Cat in year​ 1?

​$ 41,880

What is the expected sales revenue per car in dollars for​Copy-Cat in year​ 2?

​$ 43,848.36

What is the expected sales revenue per car in dollars for​Copy-Cat in year​ 3?

​$ 45,909.23

What is the expected production cost per car in dollars for​Copy-Cat in year​ 1?

​$ 33,590.96

What is the expected production cost per car in dollars for​Copy-Cat in year​ 2?

​$​ 31,572.81

What is the expected production cost per car in dollars for​Copy-Cat in year​ 3?

​$ 29,675.91

What is the expected profit in dollars for​ Copy-Cat in year​ 1? Enter a negative number for a loss.

​$​ 4,973,423.71

What is the expected profit in dollars for​ Copy-Cat in year​ 2? Enter a negative number for a loss.

​$ 7,365,330.32

What is the expected profit in dollars for​ Copy-Cat in year​ 3? Enter a negative number for a loss.

​$ 9,739,994.15

Will these new anticipated inflation rates affect the production of vintage​ 240-Zs? ​ Why?

A. The profit​ (loss) is rising​ (falling) each year as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar.

Calculation

Here we could assume that the revenue and costs are from the start of the year and will inflate afte the first year.

First we need to calculate the revenue.

Initial price =40,000

Expected overall inflation rate in the United States = 4.7%

That is:

Expected Sales Revenue :

Revenue = Initial Price * (1+Expected overall inflation rate in the United States%)n

So we need to calculate it for 3 years

Year 1 = 40,000 * (1+4.7%) = 40,000 * 1.047 =  41,880

Year 2 = 40,000 * (1+4.7%)2 = 40,000 * 1.096 = 43,848.36

Year 2 = 40,000 * (1+4.7%)3 = 40,000 * 1.148 = 45,909.23

To calculate cost and profit, first we need to find Anticipated forwards.

So in order to calculate the Anticipated forwards:

Indirect rate = ¥114.0659 per dollar

Expected overall inflation rate in the United States = 4.7%

Anticipated forwards =

Year 1 = (¥114.0659/$1.00) * (1.140659/1.047) = ¥124.2696/$1.00

Year 2 = (¥114.0659/$1.00) * (1.140659/1.047)2 = ¥135.3861/$1.00

Year 2 = (¥114.0659/$1.00) * (1.140659/1.047)3 = ¥147.4970/$1.00

We can see that Value of yen is weakening against the dollar. They have to pay an increasing amount of yen against Dollar.

Expected Production Cost :

Now we could calculate the Cost:

Cost of production = ¥4,076,500

Anticipated inflation rate for parts and labor in Japan = 2.4%

Cost of production * ((1+ Anticipated inflation rate )n/Anticipated forwards)

So cost will be:

Year 1 = 4,076,500 * ((1+2.4%)/124.2696) = 33,590.96

Year 2 = 4,076,500 * ((1+2.4%)2/135.3861) = 31,572.81

Year 3 = 4,076,500 * ((1+2.4%)3/147.4970) = 29,675.91

Expected Profit :

To calculate the profit, first we need to find the difference between revenue and cost:

Profit per car =

Year	1	2	3
Revenue (A)	$41,880.00	$43,848.36	$45,909.23
Cost (B)	$33,590.96	$31,572.81	$29,675.91
Profit (A) - (B)	$8,289.04	$12,275.55	$16,233.32

Now, we need to find profit for 600 cars that they will be selling.

Profit end of Year 1 = $8,289.04 * 600 = $4,973,423.71

Profit end of Year 2 = $12,275.55 * 600 = $7,365,330.32

Profit end of Year 3 = $16,233.32 * 600 = $9,739,994.15

So from this we can infer that the profits are rising as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar. Profits are increasing, Revenues have also an increasing trend. The decreasing factor is cost. Also we can see that the value of dollar against yen in rising, it is calculated in anticipated forwards.