Dzell Printers, Inc. (DZ) of the United States exports computer printers to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.30/US$. Exports to Brazil are currently 100,000 printers per year at the reais equivalent of $140 each. A strong rumor exists that the reais will be devalued to R$3.60/$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, DZ faces a pricing decision which must be made before any actual devaluation: DZ may either (1) maintain the same reais price and in effect sell for fewer dollars, in which case Brazilian volume will not change, or (2) maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a 25% drop in volume. Direct costs in the U.S. are 60% of the U.S. sales price. What would be the short-run (one-year) implication of each pricing strategy? Which do you recommend?
To analyze the short-run implications of each pricing strategy and make a recommendation, we need to calculate the revenue and costs associated with each option.
Option 1: Maintain the same reais price and sell for fewer dollars.
- Current reais price: $140
- Assuming a devaluation to R$3.60/$, the new reais price would be: R$140 * 3.60 = R$504
- Volume remains unchanged at 100,000 printers
- Revenue: R$504 * 100,000 = R$50,400,000
- Direct costs in the US: 60% of the US sales price = 0.60 * $140 = $84
- Total direct costs: $84 * 100,000 = $8,400,000
- Total profit: Revenue - Total direct costs = $50,400,000 - $8,400,000 = $42,000,000
Option 2: Maintain the same dollar price, raise the reais price, and experience a 25% drop in volume.
- Current dollar price: $140
- Assuming a devaluation to R$3.60/$, the new reais price would be: $140 * 3.60 = R$504
- To maintain the same dollar price, the new dollar price would be: $140 * (1/3.60) = $38.89
- Volume decreases by 25%: 100,000 * (1 - 0.25) = 75,000 printers
- Revenue: $38.89 * 75,000 = $2,916,750
- Direct costs in the US: 60% of the US sales price = 0.60 * $140 = $84
- Total direct costs: $84 * 75,000 = $6,300,000
- Total profit: Revenue - Total direct costs = $2,916,750 - $6,300,000 = -$3,383,250 (a loss)
Recommendation:
Based on the short-run implications, Option 1, maintaining the same reais price and selling for fewer dollars, would result in a profit of $42,000,000, while Option 2 would result in a loss of -$3,383,250. Therefore, it is recommended for DZ to choose Option 1 and maintain the same reais price.
It's important to note that this analysis is based on the given assumptions and forecast. In the long run, DZ should consider other factors such as market conditions, competition, and potential changes in exchange rates before making any pricing decisions.