Reference no: EM131119167

Electronic Computer Systems (ECS) designs, manufactures, sells, and services networked computer systems; associated peripheral equipment; and related network, communications, and software products. Exhibit 7.40 presents geographic segment data. ECS conducts sales and marketing operations outside the U.S. principally through sales subsidiaries in Canada, Europe, Central and South America, and the Far East; by direct sales from the parent corporation; and through various representative and distributorship arrangements. The company's international manufacturing operations include plants in Canada, the Far East, and Europe. These manufacturing plants sell their output to the company's sales subsidiaries, the parent corporation, or other manufacturing plants for further processing. ECS accounts for intercompany transfers between geographic areas at prices representative of unaffiliated-party transactions. Sales to unaffiliated customers outside the United States, including U.S. export sales, were $5,729,879,000 for Year 5, $4,412,527,000 for Year 4, and $3,179,143,000 for Year 3, which represented 50 percent, 47 percent, and 42 percent, respectively, of total operating revenues. The international subsidiaries have reinvested substantially all of their earnings to support operations. These accumulated retained earnings, before elimination of intercompany transactions, aggregated $2,793,239,000 at the end of Year 5, $2,070,337,000 at the end of Year 4, and $1,473,081,000 at the end of Year 3. The company enters into forward exchange contracts to reduce the impact of foreign currency fluctuations on operations and the asset and liability positions of foreign subsidiaries. The gains and losses on these contracts increase or decrease net income in the same period as the related revenues and expenses; for assets and liabilities, in the period in which the exchange rate changes.

Required

Discuss whether ECS should use the U.S. dollar or the currencies of its foreign subsidiaries as its functional currency.