CURRENCY EXCHANGE, TRANSFER PRICING

Golo, Inc., has two manufacturing plants, one in Singapore and the other in San Antonio. The San Antonio plant is located in a foreign trade zone. On March 1, Golo received a large order from a Japanese customer. The order is for ¥10,000,000 to be paid on receipt of the goods, scheduled for June 1. The goods are to be delivered by Golo to the Japanese company’s Los Angeles division. Golo assigned this order to the San Antonio plant; however, one necessary component for the order is to be manufactured by the Singapore plant. The component will be transferred to San Antonio on April 1 using a cost plus transfer price of $10,000 (U.S. dollars). Typically, two percent of the Singapore parts are defective. U.S. tariff on the component parts is 30 percent. Carrying cost for Golo is 15 percent per year. The spot rates for $1 U.S. are as follows:

Required:

1. What is the total cost of the imported parts from Singapore to the San Antonio plant in U.S. dollars?

2. If the San Antonio plant was not located in a foreign trade zone, what would be the total cost of the imported parts from Singapore?

3. How much does Golo expect to receive from the Japanese customer in U.S. dollars using the spot rate at the time of the order?

4. How much does Golo expect to receive from the Japanese customer in U.S. dollars using the spot rate at the time of payment?

5. Suppose that on March 1, the forward rate for June 1 delivery of $1 for yen is 107.20. If Golo’s policy is to hedge foreign currency transactions, what is the amount Golo expects to receive on June 1 in U.S. dollars?