Question

Manitowoc Crane​ (A).Manitowoc Crane​ (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 10,000 units per year at the yuan equivalent of $25,000 each. The Chinese yuan​ (renminbi) has been trading at Yuan8.40​/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan9.30​/$, after which it will remain unchanged for at least a decade. Accepting this forecast as​ given, Manitowoc Crane 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. Direct costs are​ 75% of the U.S. sales price.

a.What would be the​ short-run (one-year) impact of each pricing​ strategy?

b.Which do you​ recommend?

a.If Manitowoc Crane maintains the same yuan price and same unit​ volume, what will be the​ firm's gross​ profits?

​$ __  (Round to the nearest​ dollar.)

Answer 1

a) Selling price of 1 unit = $25,000 or 25000*8.4 = 210,000 yuans (exchange rate is 8.4 yuan/$)

Case 1: maintain the same yuan price so that Chinese volume will not change

New exchange rate = Yuan 9.3/$

since the selling price remain same i.e 210,000. The selling price in terms of dollar becomes 210,000/9.3 = $22,580.64

Total units sold = 10,000

total revenue generated = 10,000 * 22580.64 = $ 225,806,400

Also direct costs are 75 % of US sales price, so profit is 25% of US sales price .

So profit is 25% of $225,806,400 = $56,451,600

Case 2: maintain the same dollar price but experience 10 percent drop in unit volume

new selling price = 25000*9.3 = Yuan 232,500

total units sold = (1-0.1)*10000 = 9000

Total revenue generated = 25000*9000 = $225,000,000

Also direct costs are 75 % of US sales price, so profit is 25% of US sales price .

So profit is 25% of $225,000,000 = $56,250,000

b ) 1st strategy i.e maintain the same yuan price and in effect sell for fewer US dollars, so that Chinese volume does not change is recommended because this strategy results in better profits.

c)if firm maintains same Yuan price i.e 8.4/ $ and same volume i.e 10000 units and firm's profits are 25% of the revenue.

Revenue = 10000*25000 = $250,000,000

profits = 0.25* 250,000,000 = 62,500,000