Question

Dell Inc. exports computers to Brazil, whose currency, R$ (reais), has been trading at

R$4.00/US$. Dell currently exports 40,000 computers per year at reais equivalent of $400

each. A strong rumor exists that reais will be devalued to R$4.50/US$ within a month by the

Brazilian government. If the devaluation takes place, the reais is expected to stay at that level

for a decade. Accepting the forecast as given, Dell faces a pricing decision which must be

made before any actual devaluation. Dell may either (1) maintain the same reais price and in

effect sell for fewer dollars in which case the export quantity will remain the same, or

(2) maintain the same dollar price, raise the reais price in Brazil to compensate for the

devaluation, and experience a 15% drop in the export volume. The direct cost of

manufacturing computers in the U.S. is 65% of the U.S. sales price.

1. What is the current reais price of the exports to Brazilian customers?
2. What will be dollar revenue to Dell after devaluation if Dell does not change the current reais price to Brazilian customers?
3. What will be the dollar revenue to Dell after devaluation if Dell does not change the current dollar price of the exports?
4. If you are the advisor, what would be your recommendation to Dell? Explain.

Answer 1

a. Current Price = $400 * R$4 =R$1600

b. Current R$ Price = 1600

Total Revenue in R$ = 40000 Units *R$ 1600

= R$ 64000000

Converting in dollars as per new rate

= R$ 64000000/4.5

= $ 14222222.22

c.New export Units = 40000 - (40000 * 15%) = 34000

Dollar Revenue = 34000 * 400 = 13600000

d. Direct Cost = 400*65% = 260

If R$ price is not changed, total revenue is 14222222 as calculated in point b.

Total Income = 14222222.22 - (40000 units * 260)

= 3822222

If dollar price remains same total revenue as calculated in point c. will be 13600000

Total Income = 13600000 - (34000 * 260)

= 4760000

Since total income in scenario no. 2 is higher due to cost impact Dell Inc. should not change there dollar price even if it will lead to 15% drop in export volume.