Question

A Japanese firm produces a particular model of vehicle in Japan and sells it in the United States. The production cost per vehicle is ¥800,000 and the vehicle is sold in the United States at a price of $10,000. Answer the questions below on the following assumptions: (1) there are no taxes in either country; (2) there are no transaction costs; (3) production cost does not change for the Japanese firm; and (4) the Japanese firm can exchange its dollar revenue back to the Japanese yen at the stated exchange rates. If the exchange rate changes from $1.00 = ¥100 to $1.00 = ¥120, how much does the Japanese firm's profit change in percentage?

Answer 1

Production cost per vehicle = ¥ 800,000

Selling price per vehicle in United states = $ 10,000

Assumption :- No taxes in both countries

No transaction cost

Production cost does not change for japanese firm

The Japanese firm exchange its dollar revenue to Japanese yen at stated exchange rate.

If exchange rate is $1= ¥100

So, sales price realised in Japanese currency will be ¥1,000,000

So profit = sales - production cost

= ¥1,000,000 - ¥800,000

= ¥200,000

But if exchange rates changes to $1= ¥120 so, sale price realised will be ¥ 1,200,000.

So profits will also change and it will be

Profits = ¥1,200,000 - ¥800,000

= ¥ 400,000

Change in profits = ¥400,000 - ¥200,000

= ¥200,000

Percentage change in profits = (change in profits ÷ original profits)× 100

= (¥200,000÷ ¥200,000) × 100

= 100%

So, there is 100% change in profits after exchange rate changes.