Scenario Jeff Millbourne is the owner/operator of Mill- bourne Shutter Company. Over a three-year period, he...
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Scenario Jeff Millbourne is the owner/operator of Mill- bourne Shutter Company. Over a three-year period, he transformed his hobby of wood- working into a million-dollar business. The company makes custom shutters for homes and businesses. Millbourne Shutter Company built its reputation on the production of very high-quality shutters, using top-quality wood and building each shutter to exact specifica- tions. The result is a shutter that works well for years. Recently, Jeff's neighbors, Lana and Evan Howell, bought a villa in France and had Millbourne design and construct shutters for it. The job was more difficult than usual, since Jeff was unable to measure the villa's windows. However, the shutters fit perfectly and were a hit in the French village. The French subcontractor who installed the shut- ters wanted to contract with Millbourne to make shutters for some of his other jobs. He placed an initial order for shutters at €16,230. Jeff sent the purchase order to his accountant, Rosa Perez, help in translating the euros into dollars. Rosa pointed out that that, at the current exchange rate of $1 equal to 0.8115 euros, the order would bring in $20,000 (€16,230/0.8115). However, she noted, the exchange rate changes from day to day. She asked how long receipt of payment would take. Jeff figured it would take about three weeks to produce that many shutters-more if it rained and painting was delayed, then two weeks to ship overseas. It could take another four weeks for Michel to send the check. Start to finish, Jeff thought it might take two and a half months. Rosa pointed out that the time lag could mean a change in the exchange rates. If the exchange rate increased, say to 0.85 euros per dollar, the supposed $20,000 order would yield only $19,094. Of course, the reverse was also true. If the rate fell to 0.80 euros per dollar, the €16,230 could be exchanged for $20,288. Dealing in other currencies posed a new level of risk for the company-currency exchange risk. Jeff agreed to think about the issues for a little while. He decided to go ahead with the French order, but to consider each new inter- national order on a case-by-case basis, to ensure that the currency exchange risk did not get out of hand. Questions to Think About 1. What do you think are the business issues that Jeff has to consider in deciding whether or not to trade overseas? 2. Rosa pointed out that exchange rates can go in two directions. If the exchange rate increases from 0.8115 euros per dollar to 0.85 euros per dollar, Jeff will get less than he expected. On the other hand, if the exchange rate decreases, he will get more than expected. Do you think that Jeff considers the two risks (increase or decrease in exchange rates) to be equal? Would he be more concerned about one than the other? Why or why not? 3. Jeff decided to consider each new interna- tional order on a case-by-case basis. What factors might influence his decisions? Think about the shipment of the shutters overseas. Are there any considerations that might differ from shipment of shutters to another state in the United States? Would there be any difference between trade with France versus trade with other countries (e.g., Russia or Iran)? Scenario Jeff Millbourne is the owner/operator of Mill- bourne Shutter Company. Over a three-year period, he transformed his hobby of wood- working into a million-dollar business. The company makes custom shutters for homes and businesses. Millbourne Shutter Company built its reputation on the production of very high-quality shutters, using top-quality wood and building each shutter to exact specifica- tions. The result is a shutter that works well for years. Recently, Jeff's neighbors, Lana and Evan Howell, bought a villa in France and had Millbourne design and construct shutters for it. The job was more difficult than usual, since Jeff was unable to measure the villa's windows. However, the shutters fit perfectly and were a hit in the French village. The French subcontractor who installed the shut- ters wanted to contract with Millbourne to make shutters for some of his other jobs. He placed an initial order for shutters at €16,230. Jeff sent the purchase order to his accountant, Rosa Perez, help in translating the euros into dollars. Rosa pointed out that that, at the current exchange rate of $1 equal to 0.8115 euros, the order would bring in $20,000 (€16,230/0.8115). However, she noted, the exchange rate changes from day to day. She asked how long receipt of payment would take. Jeff figured it would take about three weeks to produce that many shutters-more if it rained and painting was delayed, then two weeks to ship overseas. It could take another four weeks for Michel to send the check. Start to finish, Jeff thought it might take two and a half months. Rosa pointed out that the time lag could mean a change in the exchange rates. If the exchange rate increased, say to 0.85 euros per dollar, the supposed $20,000 order would yield only $19,094. Of course, the reverse was also true. If the rate fell to 0.80 euros per dollar, the €16,230 could be exchanged for $20,288. Dealing in other currencies posed a new level of risk for the company-currency exchange risk. Jeff agreed to think about the issues for a little while. He decided to go ahead with the French order, but to consider each new inter- national order on a case-by-case basis, to ensure that the currency exchange risk did not get out of hand. Questions to Think About 1. What do you think are the business issues that Jeff has to consider in deciding whether or not to trade overseas? 2. Rosa pointed out that exchange rates can go in two directions. If the exchange rate increases from 0.8115 euros per dollar to 0.85 euros per dollar, Jeff will get less than he expected. On the other hand, if the exchange rate decreases, he will get more than expected. Do you think that Jeff considers the two risks (increase or decrease in exchange rates) to be equal? Would he be more concerned about one than the other? Why or why not? 3. Jeff decided to consider each new interna- tional order on a case-by-case basis. What factors might influence his decisions? Think about the shipment of the shutters overseas. Are there any considerations that might differ from shipment of shutters to another state in the United States? Would there be any difference between trade with France versus trade with other countries (e.g., Russia or Iran)?
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Related Book For
Introduction To Federal Income Taxation In Canada
ISBN: 9781554965021
33rd Edition
Authors: Robert E. Beam, Stanley N. Laiken, James J. Barnett
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