Question

1. Assume that Nissan spends an average of 1.875 million yen to manufacture a car in Japan, plus $2,600 to market and distribute the car in the United States. Furthermore, Nissan adds 10% margin to price the car. The exchange rate is $1 = ¥100

Assuming that the exchange rate at the end of the year is expected to be $1 = ¥80, what will be the impact of the exchange rate on the dollar cost the auto?

If Nissan had wanted to sell the car at the same price at which they were selling earlier, by how much would it have to cut costs, given the exchange rate in part a above.

If the same car were manufactured in the United States at a cost of $19,000 and 40 percent of parts were imported from Japan, what impact would the different exchange rates have on the dollar cost?

Suggest some strategies that can be used by Nissan to counter strong yen.

Suggest some strategies that can be used by Nissan in a weak yen environment.

Answer 1

Solution:

1. If the yen goes stronger to 1$=80 yen then the domestic cost of making nissan would decrease as there would be less outflow on yen for buying dollars.

2.

earliler
at 100 yen			at 80 yen
1875000		yen	1875000	yen
18750		dollars	23437.5	dollars
2600		other exp	2600	other exp
21350		dollar cost	26037.5	dollar cost
2135		10% margin	2603.75	10% margin
23485	a	total cost	28641.25	total cost	b
	a-b	cost cutting
		-5156.25

3.

	US manufacturing
	at 100 yen	yen		at 80 yen
	19000			19000
import	7600	760000		7600	608000
	26600			26600
	2660	margin		2660	margin
	29260	total cost		29260	total cost
	no impact on dollar cost

4. They can use the dollar proceeds from US to buy parts from US to negate the effect of stronger yen. Further if all liabilities are raised in US they will have automatic hedge.