Question

- Consider an US firm that imports components from China, and adds value by assembling these components into a finished product in the US. Assume that the US firm always pays in US$ for the components. Suppose the cost of imported components is $5, while domestic assembly costs to finish the product are $5, and the current exchange rate is RMB5/$.

a) Case A: If the US firm was selling 100% of the finished product output in the domestic US market at $12/unit, what is the margin of the US firm as a % of revenue?

b) Case B: If the US firm was exporting 100% of the finished product output to Eurozone markets and gets paid €12/unit in Euros, and the exchange rate is $1/€, what is the margin of the US firm as % of revenue?

c) Case C: In case A above, if the exchange rate changed to RMB 6/$, and all the other numbers and variables remain constant, what is the margin of the US firm as % of revenue?

d) Case D: In case B above, if the exchange rate changed to $0.9/€, and all the other numbers and variables remain constant (RMB5/$), what is the new margin of the US firm as % of revenue.

- Compare and contrast home replication, global, transnational and multi-domestic strategies. Please provide some examples of each type of strategy in your discussion. Please ensure that your discussion contains an understanding of the conditions under which each strategy might be considered appropriate.

Answer 1

a) The cost is = $10 and the selling price =$12 therefore,the revenue would be 20%

b) The exchange rate is 1 euro for 1 dollar therefore the revenue would be 20%

c)Since the RMB has depreciated,with one dollar the US company can buy more components using the same dollar and dropping the cost from 10 to 8 and selling them at 12,therefore the revenue will be 50%

d) The euro has appreciated, so selling in euros and exchanging them to dollars would increase the profits therefore, the new margin of revenue of the US firm would be 33.3%