Solution manual managerial accounting 8e by hansen mowen ch 18

Cur-rency appreciation makes the products of a foreign country cheaper than before, and thus, it is easier for a company in the home country to import goods.. Currency appreciation makes

CHAPTER 18 INTERNATIONAL ISSUES IN MANAGEMENT ACCOUNTING QUESTIONS FOR WRITING AND DISCUSSION

1 Differences among countries in terms of the

political, legal, and cultural environment can

all affect the firm The management

accoun-tant may find that practices that work well in

the home country do not work as well (or at

all) in other countries It is necessary for the

management accountant to be aware of all

facets of business and to be knowledgeable

and creative in applying accounting

con-cepts in various business environments

2 A foreign trade zone is an area that is

physi-cally on U.S soil but is considered to be

outside U.S commerce As a result, goods

imported into a foreign trade zone are free of

tariff or duty until they leave the zone

Therefore, companies located in a foreign

trade zone can postpone payment of tariff

and the associated loss of working capital

Additionally, the company does not pay duty

on defective materials or inventory that has

not been included in the finished product

3 Outsourcing is the payment by a company

for a business function that was formerly

done in-house In an international context,

outsourcing refers to the location of

busi-ness functions in another country

Frequent-ly, the work outsourced is to a lower-wage

country The company receives a

compara-ble quality of work but at a lower cost

4 Joint ventures are partnerships between two

or more companies The enterprise is

co-owned A company may find joint ventures

advantageous when another company has

expertise that the first company lacks In

ad-dition, restrictions by certain countries on

foreign ownership of business may mean

that a joint venture is the only avenue open

to a company wishing to expand into the

ported goods Many U.S firms have em-braced the maquiladora because of the low-cost labor, the flexible ownership structure, and the opportunity to locate close to an in-creasingly important Mexican market

6 The exchange rate is the amount for which

one currency can be traded for another The spot rate is the exchange rate in effect at the current time There are also future exchange rates, which describe the rates in effect for future delivery

7 These three types of risk relate to the impact

on the firm of changing exchange rates Transaction risk refers to the possibility that future cash transactions will be affected by changing exchange rates Economic risk re-fers to the possibility that a firm’s present value of future cash flows can be affected by exchange fluctuations Translation risk is the degree to which a firm’s financial statements are exposed to exchange rate fluctuations

8 Currency appreciation means that the home

country’s currency strengthens against

anoth-er currency In othanoth-er words, one unit of the home currency purchases more units of another currency than it did previously Cur-rency appreciation makes the products of a foreign country cheaper than before, and thus, it is easier for a company in the home country to import goods

9 Currency appreciation makes the home

country currency more expensive to foreign customers, thereby making the products of the home country firm more expensive than they were before For example, if the ex-change rate is one home country unit to one foreign country unit and the currency appre-ciates, then the exchange rate might

be-in the maquiladora downward The proposed

new production facility will be more

attrac-tive

As a local labor union leader, you would be

displeased by the potential devaluation If

Mexican wages go down relative to U.S

wages, Mexican labor will be relatively more

attractive, and more jobs may be outsourced

to Mexico

11 Hedging is a way of insuring against gains

and losses on foreign currency exchange

The company that imports the material may

be afraid that the exchange rate will change

in 90 days and that the home currency will

weaken against the foreign currency In that

case, the company may hedge by

purchas-ing a forward contract for the foreign

curren-cy, thereby locking in the exchange rate and

12 Disagree The manager of a subsidiary

should not be evaluated on the basis of fac-tors over which he or she has no control These factors may include transfer prices, currency fluctuations, local taxes, and so on The subsidiary manager should be eva-luated on the basis of revenues and costs

13 Environmental factors that may affect the

performance of divisional managers include economic, legal, political, social, and educa-tional variables

14 Internal Revenue Code Section 482 outlines

the transfer pricing methods acceptable for income tax purposes The four acceptable methods are the comparable uncontrolled price method, the resale price method, the cost-plus method, and any method jointly acceptable to the IRS and the company

EXERCISES 18–1

Your friend will take the traditional accounting and business courses required for

a major in accounting Naturally, these would include international business courses, such as international accounting and international finance In addition, she/he would be well advised to take classes relating to other cultures, including history, philosophy, literature, and foreign language(s) No individual class is crit-ical; instead, it is the sum of the classes that is important In other words, your friend will learn a little about other countries in each class Over time, that little bit will add up, giving your friend the background to understand business practices overseas and to fit business transactions into a cultural context

Suppose your friend is just about to graduate and cannot afford to spend more time in college? Then she/he should do what all management accountants need

to do—stay up to date by reading books and articles in a variety of international business areas, including information systems, marketing, management, politics, and economics

Note to Instructors: Your students may want to read Daniel M Hrisak’s “Global

Challenges Call for More CMAs and CFMs,” Strategic Finance (June 2001): pp

44–49

18–2

1 e

2 b

3 d

4 c

5 a

18–3

1 e

2 c

3 d

4 b

5 a

1 $14,200,000 × 0.30 = $4,260,000

2 $4,260,000 × 9/12 × 0.10 = $319,500

18–5

1 $14,200,000 × 0.85 × 0.30 = $3,621,000

2 Savings = ($4,260,000 – $3,621,000) + $319,500

= $639,000 + $319,500 = $958,500

18–6

Tariff savings = ($3,750,000 × 0.06 × 0.25) = $56,250 per year

Because broken items will never be sold outside the foreign trade zone, Bulwar will not owe a tariff on them

18–7

1 70,100 pesos/10.9 = $6,431

2 70,100 pesos/11.4 = $6,149

3 There is an exchange gain of $282 ($6,431 – $6,149)

18–8

1 75,000/10.9 = $6,881

2 75,000/11.4 = $6,579

3 Exchange loss = $6,881 – $6,579 = $302

4 Hedging contract = 75,000/11.1 = $6,757

Premium expense = $6,881 – $6,757 = $124

5 Net savings = $302 – $124 = $178

18–9

1 The dollar weakened against the euro (€) from June 1 to September 1 On June 1, one dollar would buy €0.833 (1/1.20) On September 1, one dollar would buy €0.794 (1/1.26)

2 On June 1, Basu would need $720,000 to pay for the purchase

€600,000 × 1.20 = $720,000

On September 1, Basu would need $756,000 to pay for the purchase

€600,000 × 1.26 = $756,000

18–10

There was an exchange loss of $36,000, calculated as follows:

Liability in dollars on June 1 $ 720,000

Payment in dollars on September 1 (756,000)

1 Persephone Company engaged in a forward contract to buy Canadian dollars for U.S dollars In other words, on September 30, Persephone expects to pay 120,000 Canadian dollars Therefore, it needs to exchange U.S dollars for Ca-nadian dollars on September 30 The forward contract allows it to buy the 120,000 Canadian dollars at a specified forward rate of Canadian dollars for U.S dollars

Had Persephone Company expected to receive Canadian dollars from the Ca-nadian company, it would have engaged in a forward contract to sell Cana-dian dollars on September 30 instead

2 Because Persephone hedges all currency exchanges, the forward rate is the applicable exchange rate Persephone will buy 120,000 Canadian dollars on September 30 for $92,308

120,000/1.30 = Canadian $ 92,308

18–12

You are delighted—the dollar has appreciated and now buys more euros than it did before The car costs € 90,000, which translates to $107,143 at the € 0.84 to $1 rate (90,000/0.84 = $107,143) At the new exchange rate, only $102,273 (90,000/0.88) is required to purchase € 90,000 Have a good trip!

18–13

Add: Shipping, duties 12.20

Less: Marketing costs (4.50)

18–14

$80 = Cost + 0.25 Cost

$80 = 1.25 Cost

Cost = $64

Therefore, the transfer price is $64

18–15

1 Mexican division’s ROI = $150,000/$1,500,000 = 10.0%

British division’s ROI = $230,000/$2,000,000 = 11.5%

2 No, we cannot directly compare the two divisions’ ROIs without knowing more about the cultural and environmental factors faced by each

18–16

1 The maximum transfer price is $200, because the Singapore plant could pur-chase the motor externally for that price

2 The minimum transfer price is $195, because that is equal to the total variable cost of $195

3 The environmental factor most important to this decision is the governmental prohibition against layoffs This could turn direct labor into a strictly fixed cost This particular prohibition is a serious one

Some Spanish plants have been virtually closed for years, yet the firms must continue to pay the workers because the government has refused permission

to lay off the workers

1 The comparable uncontrolled price method should be used because a market price exists

Add: Shipping, duties 5.05

Less: Marketing costs (4.00)

Transfer price $31.05

18–18

1 c

2 a

3 b

4 a

5 d

6 e

7 e

PROBLEMS 18–19

1 a Factors that generally determine the degree of decentralization in an

or-ganization include the following:

• Physical proximity of the organization’s divisions

• Philosophy of top-level management to commit to delegating authority

and allowing decentralized decision making

• Importance, materiality, time constraints, and risk level of decisions

b Benefits to be derived from decentralization include:

• Increased growth of the organization because decisions can be made by

more individuals closer to the operations, thus reducing pressure on and allowing ample time for top-level management to deal with strategic and long-range planning issues

• More flexibility and timelier decision making in a rapidly changing

envi-ronment

c Disadvantages of decentralization include:

• More control features required at company headquarters to monitor

di-visions/subsidiaries

• Loss of some control as central authority is reduced

• Greater pressure in allocating pooled resources

• Duplication of support functions

2 The factory currently owned and operated by LSI in Nuevo Laredo is a maqui-ladora LSI is already well acquainted with the customs of doing business in Mexico and should have relatively little difficulty expanding its operations The passage of the North American Free Trade Agreement makes LSI’s ex-pansion simpler by further easing Mexican laws governing foreign ownership

It also means that the current special U.S customs treatment of reimported goods would continue In general, NAFTA creates a more hospitable envi-ronment for U.S companies expanding production in Mexico

Alternative 1:

Advantages: This alternative involves working with a well-understood process in a well-understood environment Beryl is completely familiar with the legal and social environment in Minnesota Morale may increase because all workers will receive the higher wages The factory is already set up, sup-pliers are in line, and the company knows just how long it takes to produce the fax machines

Disadvantages: Additional workers who are not trained in Paladin’s process would need to be hired Heavier use of plant facilities will wear out plant and equipment faster The addition of a second shift may cause labor problems because those workers assigned to the second shift may want to work on the more desirable first shift

Alternative 2:

Advantages: Wages are much lower in Mexico The burgeoning Mexican mar-ket would provide demand for Paladin’s product Production in Mexico would satisfy Mexican demands for locally produced goods

Disadvantages: Paladin has no experience in Mexico There is considerable uncertainty regarding the training of Mexican workers and the start-up costs

of building a new plant Language and cultural differences may cause difficul-ties

Alternative 3:

Advantages: Location of a new plant in a foreign trade zone would save on duty-related costs There is no language difference in Dallas The opening of

a plant in the Southwest would give Paladin easier access to markets in the southern and southwestern United States Wages would be lower than those

in Minnesota

Disadvantages: The Dallas plant is a considerable distance from the

Minneso-18–21

1 Using the spot rates in effect on July 1, the following prices can be set in francs and yen:

Swiss order: $64,000 × 1.2360 = 79,104 Swiss francs

Japanese order: $124,000 × 117.70 = 14,594,800 yen

2 On October 1, the Swiss customer should pay Custom Shutters 79,104 Swiss francs If the 90-day forward rate anticipated on July 1 holds, Custom Shut-ters will receive $62,831 (79,104/1.2590)

On October 1, the Japanese customer should pay Custom Shutters 14,594,800 yen If the 90-day forward rate anticipated on July 1 holds, Custom Shutters will receive $124,000

Will Lee actually receive $186,831 ($62,831 + $124,000) on October 1? We don’t know It depends on the exchange rates in effect on October 1

Current-ly, it is expected that the dollar will weaken against the Swiss franc and stay unchanged against the yen However, this could change If Lee is bothered by the uncertainty, he could hedge by locking in the exchange rates now That would guarantee the $186,831 on October 1 He might want to do that since the anticipated trend is steadily upward for Swiss francs and the Swiss cus-tomer could very well pay late

Your objective in meeting with the IRS representative is to demonstrate that the

$10 transfer price negotiated between the European and U.S divisions is accept-able under Internal Revenue Code Section 482

Comparable uncontrolled price method:

Market price (U.S.) $14.00

Less: Variable marketing costs (1.80)

Clearly, your problem is that the comparable uncontrolled price method gives a higher transfer price than the one negotiated The problem with the above compu-tation, of course, is that it assumes that you can sell additional units of the com-ponent for $14 within the United States You can’t If there were a buyer for addi-tional units at $14 per unit, the U.S division would gladly sell them As it is, the U.S division has substantial excess capacity The $10 transfer price covers all incremental costs of production plus the landing costs Thus, a more valuable computation would be the following:

Negotiated transfer price $ 10.00

Less:

Variable costs of production (7.00)

You can also point out that there is a market for this component in Europe, and that given this fact, the negotiated transfer price has the feel of an arm’s-length transaction That is, both the U.S and the European divisions are acting in their own best interests