Hong Kong Advisory Service Worksheet – Description
Richland Crane (B). Richland 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
USD24,000
each. The Chinese yuan (CNY) has been trading at
CNY8.20=USD1.00,
but a Hong Kong advisory service predicts the renminbi will drop in value next week to
CNY9.20=USD1.00,
after which it will remain unchanged for at least a decade. Accepting this forecast as given, Richland 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, Richland’s patent expires and it will no longer export to China. After the yuan is devalued to
CNY9.20=USD1.00,
no further devaluations are expected. If Richland Crane raises the yuan price so as to maintain its dollar price, volume will increase at only
1%
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 Richland Crane will stop exporting to China. Richland’s weighted average cost of capital is
10%.
Given these considerations, what should be Richland’s pricing policy?
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