The scenario described in this question assumes that a specific part required by Suzu Manufacturing Company (Tokyo) is available in Japan for a price of 2450 yen per unit. An identical part made in the United States is available to the company for a cost of US$18 per unit plus a freight charge of US$1 per unit, or a total cost of Suzu Manufacturing Company of US$19 per unit. Suzu Manufacturing must decide where to buy the part.
The scenario described in Question 10 indicates that the exchange rate at the time of placing the order would be US$1: 109 Japanese yen. The scenario indicates further that the exchange rate will be unchanged when Suzu Manufacturing Company must pay for the part.
An exchange rate of US$1: 109 Japanese yen means that one Japanese yen will buy US$0.00917 [1 United States dollar divided by 109 Japanese yen = US$0.00917]. Therefore, one Japanese yen will buy less than one United States cent. Therefore, for Suzu Manufacturing Company to buy one unit of the required part for a cost plus freight price of US$19, the company would be required to convert 2071 Japanese yen or 2071.97 Japanese yen into United States dollars. There are two ways to calculate this exchange, as follows:
US$19 times 109 Japanese yen = 2071 Japanese yen, or
US$19 divided by 0.00917 Japanese yen = 2071.97 Japanese yen
There is no question under the scenario described in Question 10: Suzu Manufacturing Company should buy the part from the United States. The price of the part produced in the United States stated in Japanese currency is 2071 Japanese yen. This price compares to a price from the domestic manufacturer in Japan of 2450 Japanese yen. This relationship is illustrated in the Question 10 Chart (below).
In order for the part produced in Japan to be competitive with the part produced in the United States, either (a) the Japanese manufacturer would have to lower the price charged for the part or (b) the currency e...