Question

Labor Costs and Productivity -

(A) Your Texas assembly line employees earn $20 per hour and they produce an average of 8 toaster ovens per hour. You are considering relocating your toaster over assembly facility just across the border to Mexico where wages are only $8 per hour. Transportation costs to your market would be the same. How many toaster ovens per hour would your foreign employees have to produce in order for this move to break even? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Transportation Costs and Taxes -

(B) Your corporation has all of its operations in California and faces a combined state and federal average corporate tax rate of 20 percent on your annual corporate earnings of $100 million. You could relocate to Nevada and eliminate your corporate state taxes (about half of your corporate tax liability) or you could relocate to Panama and eliminate all of your corporate taxes. The problem is, the vast majority of your market is in California and the transportation costs from Panama would be about $15 million per year. Additional transportation costs from Nevada would be about $1 million. Are you leaving California based on these numbers? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Exchange Rates -

(C) While traveling abroad in Japan, you notice that an Acura costs 1.2 million yen. Curious about what that would be in dollars, you check the exchange rate and see that its $0.011/yen. What would that Acura be worth in the U.S. if you could ship it home at no cost? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Labor Costs and Productivity -

(D) You are thinking about relocating your washing machine manufacturing facility from St. Louis, Missouri to Jakarta, Indonesia. Your U.S. workers earn $20 per hour and their average productivity is 10 washing machines per hour. You estimate that your workers in Indonesia would earn $3.90 per hour and will be able to produce 2 machines per hour. You typically sell about 300,000 machines per year. Your market is entirely in the U.S. and you don't think there will be a substantial market in Indonesia anytime in the foreseeable future. Should you move your facility? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Answer 1

(A)

Texas assembly line employees earn $20 per hour and produce 8 toast ovens per hour.

One toast oven would cost $20/8 to the company to offer for the employees.

One toast oven would cost $2.5 to the company.

If they relocate to Mexico, the wage rate is $8 per hour.

In order to break even, the labor cost would be same in both Texas and Mexico.

The number of toast ovens per hour the foreign employees are bound to produce = $8 / $2.5 = 3.2 toast ovens.

In order to break even the cost of toast oven would be same, and that is used as denominator to find the break even toast ovens.

(B)

There is no additional transportation costs if the company is located in California as it has the market. But in California, the company need to pay taxes of about $20 million.

If it relocates to Nevada, the tax would get reduced by 50%, taxes would be $10 million and additional transportation cost would be $1 million. Total cost would be $11 million in this case.

If it relocates to Panama, there would be $0 corporate tax. But there is additional transportation costs amounting to $15 million. Total cost would be $15 million in this case.

Among the above three options, it is profitable to the company to relocate to Nevada.

(C)

Worth of Acura = 1.2million x $0.011 = $0.0132 million = $13,200

(D)

In U.S. the labor cost per machine would be $2 ($20/10 machines). Total labor cost for 300,000 machines per year is $600,000

If it is relocated to indonesia, the labor cost per machine would be $1.95 ($3.95/2machines). Total Labor cost for 300,000 machines is $585,000.

The facility can be moved if the transportation charges from Indonesia to U.S. market is less than of equal to $14,999

If the transportation costs are $15,000 or more, it is not profitable to move the business to Indonesia.

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Hoep this is helpful!!