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(10 points) Consider an exporter with sales to China of 10,000 units per year for the yuan equivalent of $24,000 each. The Chinese yuan has
(10 points) Consider an exporter with sales to China of 10,000 units per year for the yuan equivalent of $24,000 each. The Chinese yuan has been trading at Yuan8.20/ $, but the company fears a revaluation to Yuan 9.20/$. Direct costs are 75% of sales. (Note: costs are paid by the company in its home currency of $ as 75% of the equivalent $ value.) If the company believes this forecast, it faces a pricing decision. Given the two options below, what are the impacts on profits of each of the following options? Which option would you recommend and why? a. Option 1: maintain the same yuan price and volume will not change b. Option 2: maintain the same dollar price and sales volume will fall 10% Hint: Compute revenue as the product of price and quantity to get yuan revenue. Then convert to USD, then subtract COGS
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