Korea Co, a South Korean company, is a worldwide leader in widget (a hypothetical manufactured product) production. Europe is Korea Co's single largest market. Assumptions:
• Korea Co*s production capacity is located in South Korea and all of its costs are inclined in Korean won.
• Additions to capacity require a lead time of more than one year.
• Korea Co borrows only in South Korean won.
a. Describe the effect of a short-term appreciation of the won versus the euro on the profitability of Korea Co's sales in Europe. Address only the effects on Korea Co unit sales and profit margins.
b. Korea Co expects the appreciation of the won versus the euro to continue for the long lei in and is considering two business strategies:
• Continue to operate production plants solely in South Korea.
• Shift production equal to current European sales to Europe.
Explain the effect of each of these strategies on the long-run profitability of Korea Co's European sales.