Problem 12.2 Newport Lifts (A)
Newport Lifts (USA) 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/$,
after which it will remain unchanged for at least a decade. Accepting this forecast as given, Newport Lifts faces a
pricing decision in the face of the impending devaluation. It may either (1) maintain the same yuan price and in
effect sell for fewer dollars, in which case Chinese volume will not change; or (2) maintain the same dollar price,
raise the yuan price in China to offset the devaluation, and experience a 10% drop in unit volume. Direct costs are
75% of the U.S. sales price.
Assumptions
Sales volume per year
US dollar price per unit
Direct costs as % of US$ sales price
Direct costs per unit
Spot exchange rate, yuan/$
Expected spot rate, yuan/$
Unit volume decrease if price increased
Sales to China
US dollar price per unit
Unit volume
Sales revenue
Less direct costs
Gross profits
Values
10,000
$24,000
75%
$18,000.00
8.2000
9.2000
-10%
Case 1
Same Yuan Price
$21,391.30
10,000
$213,913,043
($180,000,000)
$33,913,043
Case 2
Same US$ Price
$24,000.00
9,000
$216,000,000
($162,000,000)
$54,000,000
Better.