Case:

A company in the U.S. agreed to sell chimney caps to a retailer in Poland. The order was for 100,000 caps. The Polish company is paying 12$ for each cap and will have to make payment in US dollars to the US seller. The U.S. company does not manufacture or assemble the chimney caps but purchases them from a Korean manufacturer. To facilitate the transaction, the U.S. company agrees to pay in Korean Won. The price for each cap is 1000 Won. The U.S. company estimates its marginal (additional cost per cap) costs (for warehousing, insurance, transportation, and so on) as an additional .50 per chimney cap.

Exchange rates at the time of signing the agreements are as follows:

USD$ 1 = 125 WON USD$ 1 = Polish Zloty .57

Questions:

1. On the line below indicate whether the firm earned a profit or loss from this transaction and what was the $ dollar amount of the profit or loss in total. (Clearly state if a profit or loss was earned, what it was and show profit or loss calculation clearly with labels in space below)

_________Place word profit or loss on line.

_________Place amount on line.

Show work clearly below:

2. a) What impact would a depreciation of the Korean Won relative to the U.S. dollar have on the U.S. companys profits/loss on this transaction? You must look at the relevant impact on Revenue and/or Costs for # 2,3, and 4. (chose increase profit, increase loss, decrease profit, decrease loss, or no change and place this answer on line below)

_________Ans. Why?

3. a) What impact would a depreciation of the Polish Zloty relative to the U.S. dollar have on the U.S. companys profit/loss on this transaction? (increase profit, decrease profit, increase loss, decrease loss, or no change on line below)

____________Ans. Why?

4. a) What impact would a depreciation of the Polish Zloty relative to the Korean Won have on the U.S. companys profit/loss? ((increase profit, decrease profit, increase loss, decrease loss, or no change on line below)

____________Ans. Why?

5. If exchange rates changed to the exchange rate shown below, state/show the amount of the U.S. companys total profit or loss on the deal now? (Show profit or loss calculation clearly).

USD$ 1 = 150 WON

USD$ 1 = Polish Zloty .40

_________Place word profit or loss on line.

_________Place amount on line.