Answer:
Hurte-Paroxysm Products, Inc. (HP)
The short-run impact of each pricing strategy is as follows:
Alternative 1 Alternative 2
Reduce Price to $170 Maintain Price of $200
Gross profit $2,500,000 $3,200,000
Reduction in Gross Profit $1,500,000 $800,000
b. (2) maintain the same dollar price of $200, raise the real price in Brazil (to R$800 from R$680)to compensate for the devaluation, and experience a 20% drop in volume.
c. If HP maintains the same real price and same unit volume, the firm's gross profits will be $2,500,000.
Explanation:
a) Data and Calculations:
Exchange rate = R$3.40/US$
Current exports of printers per year to Brazil = 50,000
US unit price of printer in dollars = $200
Brazil unit price of printer in R$ equivalent = R$680 ($200 * R$3.40)
Unit price of printer in R$ when reals is devalued = R$800 ($200 * R$4.00)
The reduced dollar price with devaluation, when real price is maintained = $170 (R$680/R$4.00)
Before Devaluation of Brazil's Real (R$):
Sales volume 50,000
Sales revenue $10,000,000 (50,000 * $200)
Direct costs 6,000,000 (50,000 * $120)
Gross profit $4,000,000
Alternative 1 Alternative 2
Reduce Price to $170 Maintain Price at $200
Sales volume 50,000 40,000 (50,000 * 80%)
Sales revenue $8,500,000 $8,000,000 ($200 * 40,000)
Direct costs 6,000,000 4,800,000 ($120 * 40,000)
Gross profit $2,500,000 $3,200,000 ($80 * 40,000)
Direct costs = $6m ($120 * 50,000) = $4.8m ($120 * 40,000)
