2. (20 points) An American company is considering relocating their Wisconsin fac

Question

2. (20 points) An American company is considering relocating their Wisconsin facility to South Korea. The current exchange rate is 1 U.S. dollar (USD) to 1100 South Korean Won (KRW). The current wage rate in South Korea is 8000 KRW per hour, and the U.S. wage rate is $15/hour. If the U.S. facility is known to be three times as productive as the South Korean facility.

a. What is the “relative” wage rate (in dollars, rounded to the nearest cent) of operating in South Korea, before taking productivity differences into account?

b. What is the “relative” wage rate (in dollars, rounded to the nearest cent) of operating in South Korea, after taking productivity differences into account?

c. Suppose that the top management has decided to move the facility to South Korea, irrespective of the above calculations (due to assurances that the South Koreans would increase their productivity). If South Korea’s current productivity is 100 units per hour, to which value should it increase at minimum, so that moving the facility is a worthy decision? (Hint – Find productivity is required by the South Koreans to ensure that the relative wage rate is equal to $15/hr)

Explanation / Answer

a. The US$ wage rate is $15 per hour and Korean rate is KRW 8000 per hour. In US$ terms the Korean wage is (8000/1100) = US$7.27. Hence the relative wage of operating in Korea is 7.27/15 = 0.48 times of US wages

b. Given that the US productivity is 3 times that of Korean workers, the relative wage will be = (7.27*3)/15 = 1.45 times of US wages. Note since for per unit of work the US workers will take 1/3 time hence the Korean wages have been multiplied by 3.

c. We need to find productivity level where the Korean relative wages are atleast equal to US ones. Which is to say that in the above equation (7.27 * x)/15 = 1 where x is the relative productivity of US to Korean workers, Solving for x we get x = 2.06. Hence the relative productivity differential should be 2.06 reduced from current 3 times. Thus when Korean workers were making 100 units, the US workers would have made 300. To be at 2.06, the Korean workers should increase to (300/2.06) = 145.63 units per hour

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