Please show calculations! :)

International Marketing Incident D: Asia Oil Prices The price of oil can fluctuate dramatically based on the economic principles of supply and demand. As new economic powers emerge, such as China and India, the demand for oil continues to increase. Add the recent political instability of major oil exporting nations in the Middle East, and it is no wonder that oil prices are volatile. As a manager it is important to understand that the unpredictable oil market can dramatically affect profit margins. Most companies, especially those extremely dependent on oil, hedge this risk by purchasing oil futures to lock in prices. This makes it easier to predict future cash flows, and eliminates the risk of uncertainty in the oil markets. When oil prices increase, the cost of shipping and landing goods in foreign countries often increase as well. AllStar is selling toothpaste in South Korea that is sourced from your China plant. Due to a spike in crude oil prices and speculation of future increases, your shipping costs are expected to double next period (increase 100%). Consider a particular SKU you sell in Korea, EMTP. The EMTP currently has revenue per unit for AllStar of 1051.72 KRW (this revenue per unit is the MSRP - allowance - average channel volume discount). AllStar currently sells 1,000,000 EMTP units per year in Korea. Per unit production, shipping and tariff costs from the China plant to Korea are: China Plant Location COGS $ (Economy Medium Tube Paste) 0.400 Original Costs ($) S. Korea Shipping COGS+Shipping Tariff % Tariff $ Total Landed Cost $ (COGS+Shipping+Tariff) 0.020 0.420 8% 0.034 0.454 Exchange rate 1000 Total Landed Cost KRW 453.600 The exchange rate is 1,000 South Korean Won (KRW) per USD. First, how will the change in shipping costs affect the total unit landed cost for this SKU? Second, how, if at all, should you change the SKU price in Korea? Is it better for AllStar to maintain the local price for their toothpaste (price to market), or raise prices to cover the increased costs and maintain the same 56.9% gross margins (pass through)? Assume each percentage increase in price corresponds to an equal percentage decrease in volume. Which pricing strategy will yield the highest total gross margin (KRW)? 1051.72 0.4536 | Incident D-Asia Oil Prices 2 B Starting Mfg. Unit Price in KRW Starting Landed Unit Cost - USD 5 Increased Landed Unit Cost - USD 5 Exchange Rate (KRW to USD) Starting Landed Unit Cost - KRW 3 Increased Landed Unit Cost - KRW e Change in Cost - KRW 0 Starting Sales in Units 1 1000 453.6 1000000 Previous Period 1051.72 1051.72 453.60 598.12 56.9% Price to Market 1051.72 1051.72 Pass Through 1051.72 2. 3 Starting Mfg. Unit Price in KRW 4 New Price in KRW 5 Landed Cost 6 Unit Gross Margin 7 Gross Margin % of Sales 8 % Change in Price 9 Volume 0 Total Gross Margin in KRW 1 2 Change in Unit Mfg. Price in KRW 3 Change in Gross Margin per Unit in KRW 4 Change in Unit Sales 5 Change in Total Gross Margin in KRW 6 1,000,000 1,000,000 598,120,000 International Marketing Incident D: Asia Oil Prices The price of oil can fluctuate dramatically based on the economic principles of supply and demand. As new economic powers emerge, such as China and India, the demand for oil continues to increase. Add the recent political instability of major oil exporting nations in the Middle East, and it is no wonder that oil prices are volatile. As a manager it is important to understand that the unpredictable oil market can dramatically affect profit margins. Most companies, especially those extremely dependent on oil, hedge this risk by purchasing oil futures to lock in prices. This makes it easier to predict future cash flows, and eliminates the risk of uncertainty in the oil markets. When oil prices increase, the cost of shipping and landing goods in foreign countries often increase as well. AllStar is selling toothpaste in South Korea that is sourced from your China plant. Due to a spike in crude oil prices and speculation of future increases, your shipping costs are expected to double next period (increase 100%). Consider a particular SKU you sell in Korea, EMTP. The EMTP currently has revenue per unit for AllStar of 1051.72 KRW (this revenue per unit is the MSRP - allowance - average channel volume discount). AllStar currently sells 1,000,000 EMTP units per year in Korea. Per unit production, shipping and tariff costs from the China plant to Korea are: China Plant Location COGS $ (Economy Medium Tube Paste) 0.400 Original Costs ($) S. Korea Shipping COGS+Shipping Tariff % Tariff $ Total Landed Cost $ (COGS+Shipping+Tariff) 0.020 0.420 8% 0.034 0.454 Exchange rate 1000 Total Landed Cost KRW 453.600 The exchange rate is 1,000 South Korean Won (KRW) per USD. First, how will the change in shipping costs affect the total unit landed cost for this SKU? Second, how, if at all, should you change the SKU price in Korea? Is it better for AllStar to maintain the local price for their toothpaste (price to market), or raise prices to cover the increased costs and maintain the same 56.9% gross margins (pass through)? Assume each percentage increase in price corresponds to an equal percentage decrease in volume. Which pricing strategy will yield the highest total gross margin (KRW)? 1051.72 0.4536 | Incident D-Asia Oil Prices 2 B Starting Mfg. Unit Price in KRW Starting Landed Unit Cost - USD 5 Increased Landed Unit Cost - USD 5 Exchange Rate (KRW to USD) Starting Landed Unit Cost - KRW 3 Increased Landed Unit Cost - KRW e Change in Cost - KRW 0 Starting Sales in Units 1 1000 453.6 1000000 Previous Period 1051.72 1051.72 453.60 598.12 56.9% Price to Market 1051.72 1051.72 Pass Through 1051.72 2. 3 Starting Mfg. Unit Price in KRW 4 New Price in KRW 5 Landed Cost 6 Unit Gross Margin 7 Gross Margin % of Sales 8 % Change in Price 9 Volume 0 Total Gross Margin in KRW 1 2 Change in Unit Mfg. Price in KRW 3 Change in Gross Margin per Unit in KRW 4 Change in Unit Sales 5 Change in Total Gross Margin in KRW 6 1,000,000 1,000,000 598,120,000