In: Accounting
Manitowoc Crane (U.S.) exports heavy crane equipment to several
Chinese dock facilities. Salesare 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 therenminbi will drop in value next week to Yuan9.00/$,
after which it will remain unchanged for atleast a decade.
Accepting this forecast as given, Manitowoc Crane faces a pricing
decision in theface of the impending devaluation. It may either (1)
maintain the same yuan price and in effect sellfor fewer dollars,
in which case Chinese volume will not change; or (2) maintain the
same dollarprice, raise the yuan price in China to offset the
devaluation, and experience a 10% drop in unitvolume. Direct costs
are 75% of the U.S. sales price.
Additionally, financial management believes that if it maintains
the same yuan sales price, volumewill increase at 12% per annum for
eight years. Dollar costs will not change. At the end of tenyears,
Manitowoc's patent expires and it will no longer export to China.
After the yuan is devaluedto Yuan9.20/$, no further devaluations
are expected. If Manitowoc Crane raises the yuan price soas to
maintain its dollar price, volume will increase at only 1% per
annum for eight years, startingfrom the lower initial base of 9,000
units. Again dollar costs will not change and at the end of
eightyears Manitowoc Crane will stop exporting to China.
Manitowoc's weighted average cost of capitalis 10%. Given these
considerations, what should be Manitowoc's pricing
policy?
a) if Manitowoc crane maintains the same yuan price and same unit volume, what will be the firm's gross profits.
if Manitowoc crane maintains the same dollar prices raises the yuan prince in China to offset the devaluation and experiences a 10% drop in unit volume what will be the firms gross profit?
b) which do you recommended