Operating Exposure What is the expected sales revenue per ca

Operating Exposure:

What is the expected sales revenue per car in dollars for? Copy-Cat in year? 1?

What is the expected sales revenue per car in dollars for? Copy-Cat in year? 2?

What is the expected sales revenue per car in dollars for? Copy-Cat in year? 3?

What is the expected production cost per car in dollars for? Copy-Cat in year? 1?

What is the expected production cost per car in dollars for? Copy-Cat in year? 2?

What is the expected production cost per car in dollars for? Copy-Cat in year? 3?

What is the expected profit in dollars for? Copy-Cat in year? 1? Enter a negative number for a loss

What is the expected profit in dollars for? Copy-Cat in year? 2? Enter a negative number for a loss

What is the expected profit in dollars for? Copy-Cat in year? 3? Enter a negative number for a loss

A. The profit? (loss) is falling? (rising) each year as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar.

B. The profit? (loss) is falling? (rising) each year as the yen is weakening against the dollar despite different inflation rates in the two countries.

C. The profit? (loss) is rising? (falling) as the revenue is growing at a higher inflation rate than the production costs and the weakening yen against the dollar allows for the production costs to fall even more.

D. The profit? (loss) is rising? (falling) each year as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar.

Solution

Soln : Step 1: Analyse alll data given :

It is also given that , production takes one year and prodiction cost occur at the end of year

Step 2 : Let\'s calculate the prodcution cost at the end of year 1 = 4056500*1.028 = Yen 4170082

Production cost in $ = 4170082 / exchange rate in 1 year

Step 3: Let\'s calculate exchange rate in 1 year using interest rate parity

Let F be the rate , in that case F = 103.7006*1.058/1.033 = 106.2103

Production cost in $ = 4170082 /106.2103 = $39262.50

Annual profit in 1st year to Copy Cat in $ = (45000- 39262.50) *500 = $2868748

Yes, the inflation rate will change the profitability, as exchange rate and production cost will vary.

Production cost after year 2 = 4286844 = $39408 (using the exchange rate = 106.21*!.058/1.033)

Profit = (45000-39408)*500 = $2795939

We can see profits are falling despite the yen is weakning despite different rates in 2 countries. (option B is correct).