Based in germany, and with manufacturing and assembly exclusively located in ger

Question

Based in germany, and with manufacturing and assembly exclusively located in germany, porsche's entire cost base is the euro or slovakian koruna (which is managed by the slovakian government to maintain stability against the euro). This means that all of the direct costs in its automobile manufacturing are incurred (for practise purpose) in eurodenominated operations (cost, markup, and basic pricing). Porsche's products are then exported to its major markets around the world, including the US, the UK, .. Exhibit 1 illustrates a possible scenario of the European cost and market pricing for the North American launch of the porsche 911 4s cabriolet in 2003 ( a 3.6-liter six cyclinder engine with a top track speed of 147mph; 0 to 62 mph in 5.3 seconds). Assuming that Porsche first established the price of the car in euros, and then - in April 2003 - set the U.S. dollar price at the then current exchange rate of $1.0862.. As illustrated in the exhibit, in the months following the price-setting, the companys margin would have been largely eliminated as a result of the continued appreciation of the euro versus the dollar. The analysis highlights the squeeze suffered by a European producer exporting to the US dollar markets. Independent of what method, degree, or effectiveness of hedging was undertaken by Porsche, the company is faced with a continuing pricing dilemma for all of its North American sales.

2. Given the change in exchange rates and the strategy employed by Porsche, would you say that the purchasing power of the U.S. dollar customer has grown stronger or weaker?

Explanation / Answer

Purchasing power of the U.S. dollar as observed from the price of the Porsche Carrera has grown weaker between the months of July and December. This can be observed by looking at the trend in change of the spot exchange rate. (Reference Figure 1 & Figure 2) The spot exchange rate as based on the product price is defined as price in U.S. dollars divided by price in Euros. As the price goes up in U.S. dollars and the price stays constant in Euros, this means that it requires more dollars to buy the same product, or that the dollar has grown weaker.

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