Case Study: Small Appliance Market in Germany

A US manufacturer is exporting small appliances to European markets. Until recently, it sold all of its products through distributors. Each distributor set the prices in local currency for each market. To gain more control over its international operations, the company recently established its own European sales and marketing subsidiary. One of the major challenges facing the new European marketing manager is how to manage local prices when exchange rate changes occur.

The marketing manager decides to focus first on the company's largest European market, Germany. Annual sales are expected to be $110,000$ units. Due to capacity constraints, the German subsidiary will not be allocated more than $110,000$ units per year. The prevailing exchange rate is $\frac{\text{\$}}{}=0\mathrm{.}820.$ Units are sold in Germany for $73\mathrm{.}80.$ Variable costs per unit are $$54.$ Because the subsidiary essentially buys finished goods from the parent company in the United States, it has no control over variable costs or contribution. The parent company expects the subsidiary to return as much dollar profit $($contribution$)$ to the United States as possible.

To explore different pricing alternatives when the dollar rises versus the euro, the manager constructs the following spreadsheet, which is provided to you as an Excel file.

$\backslash$table$[[$Item$,$Current Situation,Calculation$],[1.$ Initial USS Price,$$90,$Given$],[2.$ Starting Price in $,73\mathrm{.}80,$Given$],[3.$ Starting Volume,$110,000$ units,Given$],[,,],[4.$ Exchange Rate,$0\mathrm{.}820,$Current$],[5.$ New Euro Price,$73\mathrm{.}80,$Item $1$ Item $4],[6.$ New Price in US$$,$$$90,$Item $\frac{5}{?}$ Item $4],[7.$ New Volume,$110,000$ units,Formula, depending on price sensitivity$],[,,],[8.$ Variable Cost,$$54,$Given$],[9.$ Unit Contribution,$$36,$Item $6-$ Item $8],[10.$ Total Contribution,$$3,960,000,$Item $9$ Item $7]]$

Assignment

The marketing manager knows that while the dollar and euro are relatively stable currencies, the dollar is expected to strengthen $($appreciate$)$ relative to the euro in the coming year. The manager wants to determine how he should price the appliances if$,$ in fact, the dollar rises relative to the euro. Several alternatives are considered. To simplify the analysis, the manager estimates the effects of the various alternatives for the coming year $($that is$,$ the Fx changes can be assumed to take effect at the beginning of the firm's fiscal year and stay at the same rate for the ensuing twelve months$).$

Your job is to answer several questions, beginning with the following:

Assume the Fx changes to $in\frac{0\mathrm{.}840}{\text{\$}}.$ If the manager maintains the local price $($pricing$-$to$-$market$),$ what will be the new total contribution?

Answer

$