Operating exposure. Copy-Cat, Inc. has signed a deal to make vintage Nissan 240-Z sports cars for the next three years. The company will build the cars in Japan and ship them to the United States for sale. The current indirect rate is yen 99.0212 per dollar. The anticipated inflation rate for parts and labor in Japan is 2.7% over the next three years, and the anticipated overall inflation rate for Japan is 3.7% over the next three years. The expected overall inflation rate in the United States is 4.2 % over the next three years. (The stated rates are on an annual basis.) If Copy-Cat plans to sell 1 comma 000 cars a year at an initial price of $42 comma 000 and the cost of production is ¥4 comma 056 comma 500, what is the annual profit in dollars for Copy-Cat? Assume it takes one year for production and all sales revenues and production costs occur at the end of the year. Is this profit rising or falling each year? Why? What is the expected sales revenue per car in dollars for Copy-Cat in year 1? $ nothing (Round to the nearest cent.)

COmplete Question:

Copy-Cat, Inc. has signed a deal to make vintage Nissan 240-Z sports cars for the next three years. The company will build the cars in Japan and ship them to the United States for sale. The current indirect rate is ¥99.3925 per dollar. Just before Copy-Cat starts the project, the Japanese and U.S. governments announce new anticipated inflation numbers. The anticipated inflation rate for parts and labor in Japan is 2.7% over the next three years, and the anticipated overall inflation rate for Japan is 5.3% over the next three years. The expected overall inflation rate in the United States is 3.1% over the next three years. (The stated rates are on an annual basis.) If Copy-Cat plans to sell 500 cars a year at an initial price of $44,000 and the cost of production is¥4,096,500, what is the annual profit in dollars for Copy-Cat? Assume it takes one year for production and all sales revenues and production costs occur at the end of the year. Will these anticipated inflation rates affect the profitability of the vintage 240-Zs? Why?

What is the expected sales revenue per car in dollars forCopy-Cat in year 1?  

$ (Round to the nearest cent.)  

What is the expected sales revenue per car in dollars forCopy-Cat in year?

$(Round to the nearest cent.)  

What is the expected sales revenue per car in dollars forCopy-Cat in year ?  

$(Round to the nearest cent.)  

What is the expected production cost per car in dollars forCopy-Cat in year 1?  

$(Round to the nearest cent.)

What is the expected production cost per car in dollars forCopy-Cat in year 2?  

$(Round to the nearest cent.)  

What is the expected production cost per car in dollars forCopy-Cat in year 3?  

$(Round to the nearest cent.)  

What is the expected profit in dollars for Copy-Cat in year 1? Enter a negative number for a loss.  

$(Round to the nearest dollar.)

What is the expected profit in dollars for Copy-Cat in year 2? Enter a negative number for a loss.

$(Round to the nearest dollar.)  

What is the expected profit in dollars for Copy-Cat in year 3? Enter a negative number for a loss.  

$(Round to the nearest dollar.)

Will these new anticipated inflation rates affect the production of vintage 240-Zs? Why?  (Select the best response.)  

A. The profit (loss) is rising (falling) each year as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar.  

B. The profit (loss) is falling (rising) each year as the revenue is growing at a higher inflation rate than the production costs despite the weakening yen against the dollar.  

C. The profit (loss) is falling (rising) each year as the yen is weakening against the dollar despite different inflation rates in the two countries.  

D. The profit (loss) is rising (falling) as the revenue is growing at a higher inflation rate than the production costs and the weakening yen against the dollar allows for the production costs to fall even more.

option a

Explanation:

Copy Cat0                 1                       2                 3

Sales                          $44,000.00$   45,364.00$   46,770.28

Exchange¥ 99.3925¥   101.5134¥   103.6795¥   105.8919

Cost (yen)                  ¥ 4,096,500¥ 4,207,106¥ 4,320,697

Cost ($)                          $ 40,354.28$ 40,577.98$ 40,802.91

Profit ($)                          $ 1,822,858$ 2,393,012$ 2,983,688

Forward Exchange Rate = Spot Rate x (1 + Japan Inflation) / (1 + US Inflation)

Cost in yen increases by inflation in parts and labor, while currency adjusts to overall inflation.

A is the correct option.

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