Question

Manitowoc Crane (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are currently 16.000 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 Yuan9.10/$, 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? Which do you recommend? 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.) b. If Manitowoc Crane maintains the same dollar price, raises the yuan price in China to offset the devaluation, and experiences a 10% drop in unit volume, what will be the firm's gross profits? (Round to the nearest dollar.) Which do you recommend?

Answer 1

Step-by-step explanation:

a) Yuan price before devaluation = 25000 × 8.4 = Y210,000

Dollar price after devaluation = 210000/9.1 = $23,076.92

Total sales = 16000 × 23076 = 369230720

COGS = 16000 × 25000 × 75% = 300000000

Gross profit 69230720

Dollar price after devaluation = $25000

Total sales = 16000 × 90% × 25000 = 360000000

COGS = 16000*90%× 25000 ×75% = 270000000

Gross profit 90000000

b) Maintaining the same dollar price is better because it yields higher profits.