Question

Chinese Sourcing and the Yuan. Harrison Equipment of Denver, Colorado, purchases all of its hydraulic tubing from manufacturers in mainland China. The company has recently completed a corporate-wide initiative in six sigma/lean manufacturing. Completed oil field hydraulic system costs were reduced 4.1% over a one-year period, from $888,000 to $851,592. The company is now worried that all of the hydraulic tubing that goes into the systems (making up 19% of their total costs) will be hit by the potential revaluation of the Chinese yuan—if some in Washington get their way. How would a 11.6% revaluation of the yuan against the dollar impact total system costs?

The current cost of the hydraulic tubing is $ 161802.48. (Round to the nearest cent.)
After a revaluation of the yuan against the dollar, the cost of the hydraulic tubing will be $80571.56 . (Round to the nearest cent.)
The cost increase (impact in total system costs) as a result of the revaluation is $___ (Round to the nearest cent.)

Answer 1

The revaluation of the Chinese yuan against the dollar by 11.6% would result in Harrison Equipment's cost of hydraulic tubing increasing by $18,769.08. This additional cost would directly affect the company's total system costs and profitability.

Step-by-step explanation:

The question relates to the impact of a potential revaluation of the Chinese yuan against the dollar on the costs of a company that sources hydraulic tubing from China. Given that the current cost of the hydraulic tubing is $161,802.48, an 11.6% revaluation of the yuan would lead to an increase in cost. To calculate the impact, we would multiply the current cost by 11.6%.

The new cost after revaluation would be $161,802.48 * 1.116 = $180,571.56. Taking the provided figure after revaluation of $80,571.56, which appears to be a misunderstanding since it is lower than the current cost, we should use the correctly calculated new cost to determine the increase. Therefore, the increase in cost would be $180,571.56 - $161,802.48 = $18,769.08.

This increase would then be reflected in the total system costs, leading to a higher expense for Harrison Equipment due to the currency revaluation. It's important for firms with international trade like Harrison Equipment to be aware of such changes, as fluctuations in foreign exchange rates can have significant impacts on their production costs and, ultimately, their profitability.