Safe Seats Inc., a US based baby car seat supplier, imports car seats from Lazad

Question

Safe Seats Inc., a US based baby car seat supplier, imports car seats from Lazada Baby Products, a Malaysian supplier, based in Kuala Lumpur. They have had a mutually beneficial long term relationship with each other. Recently, the Malaysian ringgits has fluctuated widely between MYR3.25/$ to MYR4.50/$. Since both the companies wanted to continue their longtime relationship, they have agreed to a risk-sharing arrangement. As long as the spot rate on the date of an invoice is between MYR3.25/$ to MYR4.50/$, Safe Seats will pay based on the spot rate. If the spot rate falls outside this range, they will share the difference equally. This agreement is valid for the next 9 months, at which time they will re-evaluate it. Safe Seat has recently placed an order to import car seats from Lazada for MYR 4,000,000 and the current spot rate of MYR4/$.

Suppose the exchange rate changes to MYR5.50/$, what will be the dollar cost of the imports to Safe Seats?

Question 29 options:

$1,000,000

$750,000

$675,890

$800,000

$1,000,000

$750,000

$675,890

$800,000

Explanation / Answer

As per the agreement between safe seats inc and lazada baby in case the spot exceeds MYR4.50/$ the loss will be shared equally.

Current spot rate

$ = MYR5.50

Which exceeds MYR4.50/$ by MYR1, therefore this loss will be shared by both the companies equally and accordingly thye exchange rate for safe seats Inc will come out to be MYR5.00/$.

Accordingly cost to safe seats = MYR4000000/MYR5 x $ = $800000

Therefore answer will be $800000, option 4th

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