Assume that all the information given in the previous question about LWB holds. LWB has asked its finance unit to prepare forecasts for its exports to China. The finance unit of LWB forecasts that if LWB maintains the same price in yuan its export volume will increase by 12% per year for eight years. Its patent will expire at the end of eight years at which point LWB will cease to export to China. The cost of production in euros is not expected to change during this time. The finance unit forecasts that if LWB maintains the same price in euros, after the initial 10% decline in the first year, its export volume will increase 1% per year thereafter. Once more the cost of production in euros will remain unchanged and LWB will stop exports to China after year eight. The average cost of capital for LWB is 8%. Given these considerations, what pricing policy should LWB follow?

previous question:

Pre-Brexit Income Statement of Molto-Delizioso Company (Annualized), Assuming 1GBP = 1.36EUR Per unit Quantity(units) € £ Sales in UK £200 40000 8,000,000 UK Costs: 

• Contract Labor (variable cost) 200,000 

• Import of coffee machines (invoiced at €90 each) €90 40000 3,600,000 2,647,059 

• Marketing and Distribution costs (assumed to be fixed costs) 400,000 

• Other fixed costs: 

Overheads, interest, depreciation, rent, salaries, and others 500,000 Profit (UK Subsidiary) £4,252,941 Or €5,784,000 in Hong Kong and faces a pricing decision in view of the impending change in the exchange rate. LWB is considering two pricing decisions: 

(i) to maintain the same price for each crane in yuan in which case is expected to continue to sell the same volume (1,000 units) in China or 

(ii) to maintain the same price in euro (and raise the price in yuan) in which case it expects its export volume to drop 10%. The direct costs of production are 75% of the German sales price.

Answer rating: 100% (QA)

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