Richland Crane (B). Richland 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 USD24,000 each.The Chinese yuan (CNY) has been trading at CNY8.20= USD1.00, but a Hong Kong advisory service predicts the renminbi will drop in value next week to CNY9.20 = USD1.00, after which it willremain unchanged for at least a decade. Accepting this forecast as given, Richland Crane faces a pricing decision in the face of the impending devaluation. It may either (1) maintain the same yuanprice 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 a10% 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 12% per annum through year eight. Dollar costs will not change. At the endof 8 years, Richland's patent expires and it will no longer export to China. After the yuan is devalued to CNY9.20 = USD1.00, no further devaluations are expected. If Richland Crane raises the yuanprice so as to maintain its dollar price, volume will increase at only 1% per annum through year eight, starting from the lower initial base of 9,000 units. Again, dollar costs will not change, and at theend of eight years Richland Crane will stop exporting to China. Richland's weighted average cost of capital is 10%. Given these considerations, what should be Richland's pricing policy?CASE 1If Richland Crane maintains the same yuan price and in effect sells for fewer dollars, the annual sales price per unit is equal to(USD24,000 × CNY8.20/USD1.00) ÷ CNY9.20/USD1.00 = USD21,391.3. The direct cost per unit is 75% of the sales, or USD24,000 × 0.75=USD18,000. Calculate the gross profits for years 1through 4 in the following table: (Round to the nearest dollar.)Case 1Sales volume (units)Sales price per unitTotal sales revenueDirect cost per unitTotal direct costsGross profitsUSDUSDUSDYear 110,00021,391.3 USD18,000 USDUSDYear 221,391.3 USD18,000 USDUSDYear 321,391.3 USD18,000 USDUSDYear 421,391.318,000

We are going to solve this question using the logic below:Sales volume from year 2 onwards =…

Answered: CASE 1 If Richland Crane maintains the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 4P

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