Flame Fixtures, Inc. Case Study Business Application of Purchasing Power Parity
ID: 2612756 • Letter: F
Question
Flame Fixtures, Inc. Case Study
Business Application of Purchasing Power Parity
It has recently been negotiating with a Mexican firm
called Corón Company, from which it will purchase some of the
necessary parts. Every three months, Corón Company will send a specified number of parts with the bill invoiced in
Mexican pesos. By having the parts produced by Corón, Flame expects to save abou
t 20 percent on production costs.
Corón is only willing to work out a deal if it is assured that it will receive a minimum specified amount of orders every
three
months over the next 10 years, for a minimum specified amount. Flame will be required to use its
assets to serve as
collateral in case it does not fulfill its obligation. The price of the parts will change over time in response to the costs o
f
production. Flame recognizes that the cost to Corón will increase substantially over time as a result of the
very high
inflation rate in Mexico. Therefore, the price charged in pesos likely will rise substantially every three months. However,
Flame feels that, because of the concept of purchasing power parity (PPP), its dollar payments to Corón will be very
stable
.
According to PPP, if Mexican inflation is much higher than U.S. inflation, the peso will weaken against the dollar by that
difference. Since Flame does not have much liquidity, it could experience a severe cash shortage if its expenses are
much higher tha
n anticipated. The demand for Flame’s product has been very stable and is expected to continue that
way. Since the U.S. inflation rate is expected to be very low, Flame likely will continue pricing its lamps at today’s prices
(in dollars). It believes that
by saving 20 percent on production costs it will substantially increase its profits. It is about
ready to sign a contract with Corón Company
Guidelines for Case Study
:
For this assignment
,
you are to evaluate
the mini case study. T
he central issue in your
analysis should be to describe what the case tells us about the theory and practice of International Finance Management.
In analyzing the case, you should draw upon class readings, internet resources as well as personal experiences that may
be relevant. S
ome general questions that you may want to consider include the following:
What are the issues?
Who are the actors?
What are the organizational forces?
MBA 6651, International Finance
3
What are the external forces?
What theoretical perspectives or models help you understand what happened
in the case? How?
What does the case tell us about: The environment within which International Finance occurs? The nature of the
International Finance Management system and the policy making process? The decision making process?
Leadership and management?
Administrative ethics?
What recommendations would I make?
How would I propose to do things differently
Explanation / Answer
Answer: The Key issues are :
1. Adjusting the price to inflation.
2. The adjusted price should cover the cost
3. Venture will require temporary transfer of managers
Answer: The actors are:
1. Sabre
2. Mexican partner
Answer: The organizational forces are:
Answer: The external forces are:
Answer: Theories of international trade take place in this case which helps to understand the
variations in productive system.
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