2. (20 points) An American company is considering relocating their Wisconsin fac

Question

2. (20 points) An American company is considering relocating their Wisconsin facility to South Korea. The current exchange rate is 1 U.S. dollar (USD) to 1100 South Korean Won (KRW). The current wage rate in South Korea is 8000 KRW per hour, and the U.S. wage rate is $15/hour. If the U.S. facility is known to be three times as productive as the South Korean facility.

a. What is the “relative” wage rate (in dollars, rounded to the nearest cent) of operating in South Korea, before taking productivity differences into account?

b. What is the “relative” wage rate (in dollars, rounded to the nearest cent) of operating in South Korea, after taking productivity differences into account?

c. Suppose that the top management has decided to move the facility to South Korea, irrespective of the above calculations (due to assurances that the South Koreans would increase their productivity). If South Korea’s current productivity is 100 units per hour, to which value should it increase at minimum, so that moving the facility is a worthy decision? (Hint – Find productivity is required by the South Koreans to ensure that the relative wage rate is equal to $15/hr)

Explanation / Answer

a. Current wage rate in south korea is 8000 KRW per hour or 8000/1100 = $7.27 per hour. Current wage rate in US is $15 per hour. The relative wage rate of operating in south korea before taking into account productivity differences is 15/7.27 = $2.06

b. Taking productivity into account, the american facility will produce the quantity in an hour which the korean facility will take 3 hours to produce. What it produces in an hour will be produced by the american facility in 1/3 or 20 minutes. Therefore, wage rate in south korea will be $7.27/3 = $2.42. Relative wage rate after taking into account roductivity differences will be 15/2.42 = $6.20

c. At 100 units, the korean wage rate is $7.27 per hour. Therefore at $15 per hour wage rate, the productivity should rise to (100 x 15)/7.27 = 206 units.

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