Rococo, Inc. of France exports leather couches to Turkey, whose currency, the lira (TRY), has been trading at

TRY2.98/.Exports to Turkey are currently 42,000couches per year at the lira equivalent of1,170each. Direct costs in France are

47% of the French sales price. A strong rumor exists that the lira will be devalued to TRY3.30/

within two weeks by the Turkish government. Should the devaluation take place, the lira is expected to remain unchanged for another decade.

Accepting this forecast as given, Rococo faces a pricing decision that must be made before any actual devaluation: Rococo may either (1) maintain the same lira price and in effect sell for fewer euros, or (2) maintain the same euro price and raise the lira price in Turkey to compensate for the devaluation. Rococo believes that if it maintains the same price in Turkish lira as a permanent policy, volume will increase at 10% per annum for six years starting from the lower initial base of

42,000 units, and costs will not change. At the end of six years, Rococo's patent expires and it will no longer export to Turkey. If Rococo raises the price in lira so as to maintain its euro price, volume will increase at only 5% per annum for six years starting from a lower initial base of 33,600 units. Again, euro costs will not change, and at the end of six years, Rococo will stop exporting to Turkey. Rococo's weighted average cost of capital is 12%.

Given these considerations, what do you recommend for Rococo's pricing policy? Justify your recommendation.