You have a company that produces a certain high tech product. Currently you produce only in the United States employing all U.S. resources. China is a major customer making up 40 percent of your market. For several years your firm has been returning 20 percent on invested capital. Due to the trade war between China and the United States, China has placed a 25 percent tariff on your product. You try to raise the price by 25 percent to compensate. Your customers in China unanimously tell you that you must reduce your price or they will switch to your Canadian competitor who does not face such a tariff.

Your Canadian competitor uses a technology that you licensed them to use due to pressure from U.S. authorities concerning your monopoly position. Their product is good, but not quite as good as your current version. They already sold their product for less that you sold yours before the trade wars.

If you reduce your price so that you eat the entire tariff, you will still be priced above the Canadian firm. If you do not reduce your price at all you expect enough lost sales to bring your overall return down to 3 percent. If you reduce your price by 50 percent you expect your return to fall to 8 percent. Your daughter (vice president of operations), suggests the alternative of producing in Vietnam which does not have a tariff issue with China.

View the following data:

Pre-trade war 25% price increase 12% price increase Produce in Vietnam

Return 20% 3% 8% 18%

(risk) 25% 35% 30% 30%

What should you do? Analyze rigorously.

Answer rating: 100% (QA)

Analyzing Your Options Based on the information provided heres a rigorous analysis of your options Option 1 Maintain Current Price 3 Return Pros This ... View the full answer