Daisy Farm, a NSW based dairy company exports fresh milk to China. Chinese Yuan (CNY) has been trading at AUD/CNY5.00. Exports to China are currently 100,000 litres per year at the equivalent price of $0.50 per litre. There is a strong rumour that the CNY will be devalued to AUD/CNY$5.60 in the next month. Should the devaluation actually take place, the CNY is expected to remain unchanged for another 10 years. Accepting the rumour/forecast as given, the company faces a pricing decision which must be made before actual devaluation:

The company may either:

• maintain the same CNY price and in effect sell for fewer dollars, in which case the export volume will not change OR
• maintain the same dollar price, raise the CNY price in China to compensate for the devaluation and experience a 20% drop in volume. Direct costs in Australia are 60% of the Australian selling price.

1. What would be the short-run (one-year) implication of each pricing strategy?
2. Explain which strategy you would recommend to Daisy Farm.
3. Discuss what other factors Daisy farm should take in to consideration. (Maximum 350 words)

Answer rating: 100% (QA)

The shortrun implication of maintaining the same CNY price despite the devaluation would result in a ... View the full answer