Larissa Warren, the owner of East Coast Yachts, has been in discussions with a y

Question

Larissa Warren, the owner of East Coast Yachts, has been in discussions with a yacht dealer in Monaco about selling the company's yachts in Europe. Jarek Jachowicz, the dealer, wants to add East Coast Yacht's to his current retail line. Jarek has told Larissa that he feels the retail sales will be approximately 5 Million euros per month. All sales will be made in Euros, and Jarek will retain 5% of the retail sales as commission, which will be paid in euros. Since the yachts will be customized to order, the first sales will take place in one month. Jarek will pay East Coast Yachts for the order 90 after it is filled. This payment schedule will continue for the length of the contract between the two companies. Larissa is confident the company can handle the extra volume with its existing facilities, but she is unsure about any potential financial risk of selling its yachts in Europe. In her discussion with Jarek, she found the current exchange rate is $.73/euro. At the exchange rate, the company would spend 70% of the sales income on production cost. This number does not reflect the sales commission to be paid to Jarek. Taking all factors into account, should the company pursue international sales further? Why or Why not?

Explanation / Answer

1. What are the pros and cons of the international sales plan? What additional risks will the company face? pros the company may gain profits due to the effect of strengthening of the dollar. The cons to consider the political risks and different currency denominations. ===== Language and cultural differences is critical in all business transactions. Also, different countries have unique cultural heritages that shape values and influence the conduct of business. Additionally, each country has its own unique economic and legal systems, and these differences can cause significant problems when a corporation tries to coordinate and control its worldwide operations. 2. What happens to the company’s profits if the dollar strengthens? What if the dollar weakens? If the dollar strengthens, the price in Euro goes up. This means that the company’s yachts price in Europe will go up. Therefore, to sell the yacht at such a high price will give the company greater profit. The opposite goes to when the dollar weakens 4. How could the company hedge its exchange rate risk? What are the implications for this approach? The company can hedge its exchange rate risk through forward markets. Another way is to match up of foreign currency-denominated assets and liabilities. the firm can borrow in the foreign country. Fluctuations in the value of the foreign subsidiary’s assets will then be at least partially offset by changes in the value of the liabilities. The implications of these approaches are that, the company can be able to control the day-to-day fluctuations in exchange rates. The company can also control fluctuation in the value of a foreign operation due to unanticipated changes in relative economic conditions. 5. Taking all factors into account, should the company pursue international sales further? Why or why not? Since the company will gain profits from this operation, they should pursue international sales. However, since “Jarek Jachowitcz, the dealer, wants to ass East Coast Yachts to his current retail line”, it shows that this is the first time for the company to do a business with this foreign company. Therefore, East Coast Yachts must take into consideration the culture heritage of doing business in Europe

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