Chez Jackman, the owner of Canadian owned Jackman Grills, has been in discussion

Question

Chez Jackman, the owner of Canadian owned Jackman Grills, has been in discussions with a kitchen appliance dealer in Michigan USA about selling grills in the United States. Jarek Jachowicz, the dealer, wants to add Jackman Grills to his current retail line. Jarek has told Chaz that he feels the retail sales will be approximately 55 million USD per month. Jack will retain 5% of retail sales as commission, paid in USD. The first sales will take place in one month. Jarek will pay Jackman Grills for the order 90 days after it is filled. The payment schedule will continue between them for the length of the contract between the two companies. Chat is confident the company can handle extra volume with its existing facilities, but she is unsure about any potential financial risks of selling grills in the US. In her discussions with Jarek she found the current exchange rate is $1CAD to $0.77 USD. At this exchange rate the company would spend 70% of the sales revenue on production costs. This number does not reflect the sales commission to be paid to Jarek. Chat deeded to ask Seamus O'Toole the company's financial analyst, to prepare an analysis of the proposed international sates. Specifically she asks Seamus to answer the following questions: What are the pros and cons of the international sales plan? What additional risks will the company face? What will happen to the company's profit if the dollars strengthens? What if the dollar weakens? Ignoring taxes. What are Jackman's projected gains or losses from this proposed arrangement at the current exchange rate of $0.77? What will happen to the profits if the exchange rate of changes to $0.85? At what point would it no longer be profitable to sell grills in the US? How can the company hedge its exchange rate risk? Taking all factors into account, should the company pursue international sales further? Why or Why not? Prepare a memo with calculations for Chat Jackman.

Explanation / Answer

1.

Pros of the international sales plan:

a. The company will get globalization benefits

b. The overall turnover of the company will increase

c. Company will retain foreign exchange

Cons:

a. Commission expenses of the company will increase

b. Debtors will pile up

c. Fluctuation in foreign exchange rate may cause fluctuation in profits and also losses.

2.

If the dollar strengthens, the company’s profits will come down and if the dollar weakens, then the company’s profits will increase.

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