Question

 Manitowoc Crane​ (U.S.) exports heavy crane equipment to several Chinese dock facilities

Manitowoc Crane (A). 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 $22,000 each. The Chinese yuan (renminbi) has been trading at Yuan 8.30/$, 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, 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? b. Which do you recommend? a. If Manitowoc Crane maintains the same yuan price and same unit volume, what will be the firm's gross profits? $ 37888889 (Round to the nearest dollar.) 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.)

Answer 1

Solution- (a)

The current gross profit [(Selling price*(100%-Direct costs as % of price))*no. of units] of Manitowoc is $55,000,000 [($22,000*(100%-75%))*10000].

A look at the alternative pricing strategies and their impact on profits

At present, Manitowoc sells 10,000 units at Yuan 182,600 per unit (i.e. $22,000*8.3). Now, when Yuan gets depreciated to Yuan 9 per USD, there are two pricing alternatives available to Manitowoc which are as follows:

1) Keeping the Yuan price same as before, i.e. Yuan 182,600 in which case the dollar equivalent of sales per unit would become $20,288.9 (calculated as Yuan 182,600/9).

In this case, the sales volume would be unchanged at 10,000 units and profitability would look like as follows:

Selling price per unit (USD)= $20,288.9

Direct costs per unit = $22,000*75%= $16,500

(Assumed that the direct costs are 75% of current US price i.e. $22,000 as there is no mention in the question of change in direct costs with the possible change in the USD equivalent of selling price)

Total gross profit= (Sales per unit - Direct costs per unit)*No. of units = ($20,288.9-$16,500)*10000= $37,888,889

2) Keeping dollar price of selling price unchanged at $22,000, in which case the yuan equivalent selling price would be Yuan 198,000 (calculated as $22,000*9). However, in this scenario the no. of units would fall by 10% to 9,000 units (i.e. 10,000*90%). The profitability of the firm would be as follows:

Selling price per unit (USD)= $22,0000

Direct costs per unit = $22,000*75%= $16,500

Total gross profit= (Sales per unit - Direct costs per unit)*No. of units = ($22,000-$16,500)*9000= $49,500,000

Therefore, the short-run impact of each strategy is calculated as follows:

	Strategy 1 (Same Yuan price)	Strategy 2 (Same $ price)
Existing gross profit with Yuan as 8.3/USD (A)	$55,000,000	$55,000,000
Revised gross profit of two strategies (B)	$37,888,889	$49,500,000
Change in profit [(B)-(A)], i.e. Short-run impact of strategies on one-year gross profit	-$17,111,111	-$5,500,000

Solution- (b)

Strategy 2, i.e. keeping USD price unchanged is better because it leads to a reduction in yearly gross profit by $5.5 million while the other strategy of keeping Yuan price unchanged leads to a reduction in yearly gross profit by $17.11 million. Hence, the USD price should be unchanged even though it leads to reduction in sales volume by 10%.

Solution- (c)

Keeping the Yuan price same as before, i.e. Yuan 182,600 in which case the dollar equivalent of sales per unit would become $20,288.9 (calculated as Yuan 182,600/9).

In this case, the sales volume would be unchanged at 10,000 units and gross profitability is calculated as follows:

Selling price per unit (USD)= $20,288.9

Direct costs per unit = $22,000*75%= $16,500

(Assumed that the direct costs are 75% of current US price i.e. $22,000 as there is no mention in the question of change in direct costs with the possible change in the USD equivalent of selling price)

Total gross profit= (Sales per unit - Direct costs per unit)*No. of units = ($20,288.9-$16,500)*10000= $37,888,889

Solution- (d)

Keeping dollar price of selling price unchanged at $22,000, in which case the yuan equivalent selling price would be Yuan 198,000 (calculated as $22,000*9). However, in this scenario the no. of units would fall by 10% to 9,000 units (i.e. 10,000*90%). The gross profitability of the firm would be as follows:

Selling price per unit (USD)= $22,0000

Direct costs per unit = $22,000*75%= $16,500

Total gross profit= (Sales per unit - Direct costs per unit)*No. of units = ($22,000-$16,500)*9000= $49,500,000