Reference no: EM13215679
Larissa Warren, the owner of East Coast Yachts, has been in discussion with ayacht dealer in Monaco about selling the company's yachts in Europe. Jarek Jachowitcz,the dealer, wants to ass East Coast Yachts to his current retail line. Jarek has told Larissathat he feels the retail sales will be approximately €5 million per month. All sales will bemade in euros, and Jerek will retain 5 percent of the retail sales as commission, whichwill be paid in euros. Since the yachts will be customized to order, the first sales willtake place in one month. Jarek will pay EastCoast Yachts for the order 90 days after it isfilled. This payment schedule will continue for the length of the contract between thetwo companies.Larissa is confident the company can handle the extra volume with its existingfacilities, but she is unsure about any potential financial risks of selling its yachts inEurope. In her discussion with Jarek, she found that the current exchange rate is $0.65/€.At this exchange rate, the company would spend 70 percent of the sales income on production costs. The number does not reflect the sales commission to be paid to Jarek.Larissa has decided to ask Dan Ervin, the company's financial analyst, to prepare ananalysis of the proposed international sales. Specifically, she asks Dan to answer thefollowing questions:
1. What are the pros and the cons of the international sales plan? What additional riskswill the company face? Your analysis may be assisted by addressing the following questions:
a. What additional risks will the company face as a result of the proposed international sales?
b. What happens to the company's profits if the U.S. dollar strengthens? What if the U.S. dollar weakens?
Ignoring taxes, what are East Coast Yacht's projected gains or losses from this proposed arrangement at the current exchange rate of $0.73/€? What happens to the profits if the exchange rate changes to $0.80/€? At what exchange rate will the company break even?
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