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Problem 11.3

Murray Exports sells heavy crane equipment in China and faces a decision on pricing strategy in response to an expected currency devaluation. It has two options: 1) maintain the yuan price and sell for fewer dollars, keeping Chinese volume the same, or 2) maintain the dollar price by raising the yuan price and experiencing a 10% drop in volume. Option 1 would yield $213.9 million in revenue and $33.9 million in profits, while option 2 would yield $216 million in revenue and $54 million in profits. The recommended strategy is option 2, to maintain the dollar price, since it results in higher profits.

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461 views

Problem 11.3

Murray Exports sells heavy crane equipment in China and faces a decision on pricing strategy in response to an expected currency devaluation. It has two options: 1) maintain the yuan price and sell for fewer dollars, keeping Chinese volume the same, or 2) maintain the dollar price by raising the yuan price and experiencing a 10% drop in volume. Option 1 would yield $213.9 million in revenue and $33.9 million in profits, while option 2 would yield $216 million in revenue and $54 million in profits. The recommended strategy is option 2, to maintain the dollar price, since it results in higher profits.

Uploaded by

Samer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLS, PDF, TXT or read online on Scribd
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Problem 11.

3 Murray Exports (A)

Murray Exports (U.S.) exports heavy crane equipment to several Chinese dock facilities. Sales are 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 the renminbi will drop in value next week to Yuan9.00/$,
after which it will remain unchanged for at least a decade. Accepting this forecast as given, Murray Exports 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?
b. Which do you recommend?

Assumptions Values
Sales volume per year 10,000
US dollar price per unit $24,000
Direct costs as % of US$ sales price 75%
Direct costs per unit $18,000.00
Spot exchange rate, yuan/$ 8.2000
Expected spot rate, yuan/$ 9.2000
Unit volume decrease if price increased -10%

Case 1 Case 2
Sales to China Same Yuan Price Same US$ Price

US dollar price per unit $21,391.30 $24,000.00


Unit volume 10,000 9,000

Sales revenue $213,913,043 $216,000,000


Less direct costs ($180,000,000) ($162,000,000)
Gross profits $33,913,043 $54,000,000
Better.

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