Homework answers / question archive / Manitowoc Crane (8)

Manitowoc Crane (8)

Finance

Share With

Manitowoc Crane (8). 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 $22,000 each. The Chinese yuan (renminbi) has been trading at Yuan 7.60/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan 8.30/$, 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. Additionally, financial management believes that if it maintains the same yuan sales price, volume will increase at 10% per annum through year eight. Dollar costs will not change. At the end of years, Manitowoc's patent expires and it will no longer export to China. After the yuan is devalued to Yuan 8.30/5, no further devaluations are expected. If Manitowoc Crane raises the yuan price so as to maintain its dollar price, volume will increase at only 2% per annum through year eight, starting from the lower initial base of 9,000 units. Again, dolar costs will not change, and at the end of eight years Manitowoc Crane will stop exporting to China. Manitowoc's weighted average cost of capital is 13%. Given these considerations, what should be Manitowoc's pricing policy? CASE 1 If Manitowoc Crane maintains the same yuan price and in effect sels for fewer dollars, the annual sales price per unit is equal to ($22,000 x Yuan760/5) - Yuan 8.301$ - $20,144.58. The direct cost per unit is 75% of the sales, or $22,000 X 0.75 $16.500 Calculate the gross profits for years through 4 in the following table (Round to the nearest dollar) Year 2 Year 3 Year 4 Year 1 10,000 20,144,585 $ 20,144,68 20,144,585 20,144.58 Case 1 Sales volume (units) Sales price per unit Total sales revenue Direct cost per unit Total direct costs Gross profits 5 16.500 5 16,500 5 16,500 5 16,500