Flame Fixtures, Inc. Case Study

Business Application of Purchasing Power Parity

It has recently been negotiating with a Mexican firm

called Corn Company, from which it will purchase some of the

necessary parts. Every three months, Corn Company will send a specified number of parts with the bill invoiced in

Mexican pesos. By having the parts produced by Corn, Flame expects to save abou

t 20 percent on production costs.

Corn is only willing to work out a deal if it is assured that it will receive a minimum specified amount of orders every

three

months over the next 10 years, for a minimum specified amount. Flame will be required to use its

assets to serve as

collateral in case it does not fulfill its obligation. The price of the parts will change over time in response to the costs o

f

production. Flame recognizes that the cost to Corn will increase substantially over time as a result of the

very high

inflation rate in Mexico. Therefore, the price charged in pesos likely will rise substantially every three months. However,

Flame feels that, because of the concept of purchasing power parity (PPP), its dollar payments to Corn will be very

stable

.

According to PPP, if Mexican inflation is much higher than U.S. inflation, the peso will weaken against the dollar by that

difference. Since Flame does not have much liquidity, it could experience a severe cash shortage if its expenses are

much higher tha

n anticipated. The demand for Flames product has been very stable and is expected to continue that

way. Since the U.S. inflation rate is expected to be very low, Flame likely will continue pricing its lamps at todays prices

(in dollars). It believes that

by saving 20 percent on production costs it will substantially increase its profits. It is about

ready to sign a contract with Corn Company

Guidelines for Case Study

:

For this assignment

,

you are to evaluate

the mini case study. T

he central issue in your

analysis should be to describe what the case tells us about the theory and practice of International Finance Management.

In analyzing the case, you should draw upon class readings, internet resources as well as personal experiences that may

be relevant. S

ome general questions that you may want to consider include the following:

What are the issues?

Who are the actors?

What are the organizational forces?

MBA 6651, International Finance

3

What are the external forces?

What theoretical perspectives or models help you understand what happened

in the case? How?

What does the case tell us about: The environment within which International Finance occurs? The nature of the

International Finance Management system and the policy making process? The decision making process?

Leadership and management?

Administrative ethics?

What recommendations would I make?

How would I propose to do things differently