Question

Manitowoc Crane (B). 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 $25,000 each. The Chinese yuan (renminbi) has been trading at Yuan7.70/$, but a Hong Kong advisory service predicts the renminbi will drop in value next week to Yuan8.40/$, after which it will remain unchanged for at least a decade. Accepting this forecast as given, Manitowoc Crane faces a pricing decision in the face of the impending devaluation. It may either (1) maintain the same yuan price and in effect sell for fewer dollars, in which case Chinese volume will not change; or (2) maintain the same dollar price, raise the yuan price in China to offset the devaluation, and experience a 10% drop in unit volume. Direct costs are 75% of the U.S. sales price. Additionally, financial management believes that if it maintains the same yuan sales price, volume will increase at 12% per annum through year eight. Dollar costs will not change. At the end of 8 years, Manitowoc's patent expires and it will no longer export to China. After the yuan is devalued to Yuan8.40/$, no further devaluations are expected. If Manitowoc Crane raises the yuan price so as to maintain its dollar price, volume will increase at only 1.5% per annum through year eight, starting from the lower initial base of 9,000 units. Again, dollar 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 sells for fewer dollars, the annual sales price per unit is equal to ($25,000 x Yuan7.70/$) +Yuan8.40/$ sales, or $25,000 x 0.75 = $18,750. Calculate the gross profits for years 1 through 4 in the following table: (Round to the nearest dollar.) $22,916.67. The direct cost per unit is 75% of the Year 3 Year 4 Case 1 Year 1 Year 2 Sales volume (units) 10,000 Sales price per unit 22,916.67 $ 22,916.67 $ $ 22,916.67 22,916.67 Total sales revenue Direct cost per unit $ 18,750 $ 18,750 $ 18,750 $ 18,750 Total direct costs Gross profits

Answer 1

Case 1	Year 1	Year 2	Year 3	Year 4
Sales volume (in units)	10000	11000	12100	13310
Sales price per unit	$22,917	$22,917	$22,917	$22,917
Total sales revenue	$22,91,66,700	$25,20,83,370	$27,72,91,707	$30,50,20,878
Direct cost per unit (75% of sales price)	$18,750	$18,750	$18,750	$18,750
Total direct costs	$18,75,00,000	$20,62,50,000	$22,68,75,000	$24,95,62,500
Gross profits	$4,16,66,700	$4,58,33,370	$5,04,16,707	$5,54,58,378

Key points to note

(1) Sales volume is increasing at the rate of 10% every year, as shown.

(2) Sales price per unit will remain constant as shown

(3). Total sales revenue= sales volume in units * sales price per unit

(4) Direct costs per unit was given in the question. Although I feel it should be .75 x 22917. But since it was given, I have used it as is.

(5) Total Direct costs= sales volume in units * Direct costs per unit

(6) Gross profit =Total sales revenue- Total Direct costs