is a multinational corporation based in the US. Its manufacturing facilities are located in Pittsburgh and hence its labor and manufacturing costs are incurred in US dollars (USD). A large fraction of its sales, however, are made to German customers who pay for the goods in Deutschemarks (GDM). There is a six-month lead time between the placement of a customer order and delivery of the product. XYZ's cost of production is 80% of the sale price. Suppose XYZ receives a $1MM GDM order and that the current USD/GDM exchange rate is 0.60 (i.e. 1 GDM = 0.60 USD). The cost of production of this order is $480,000 (0.60 x $1MM x 0.80). The
Critical Path Method
The critical path is the longest succession of tasks that has to be successfully completed to conclude a project entirely. The tasks involved in the sequence are called critical activities, as any task getting delayed will result in the whole project getting delayed. To determine the time duration of a project, the critical path has to be identified. The critical path method or CPM is used by project managers to evaluate the least amount of time required to finish each task with the least amount of delay.
Cost Analysis
The entire idea of cost of production or definition of production cost is applied corresponding or we can say that it is related to investment or money cost. Money cost or investment refers to any money expenditure which the firm or supplier or producer undertakes in purchasing or hiring factor of production or factor services.
Inventory Management
Inventory management is the process or system of handling all the goods that an organization owns. In simpler terms, inventory management deals with how a company orders, stores, and uses its goods.
Project Management
Project Management is all about management and optimum utilization of the resources in the best possible manner to develop the software as per the requirement of the client. Here the Project refers to the development of software to meet the end objective of the client by providing the required product or service within a specified Period of time and ensuring high quality. This can be done by managing all the available resources. In short, it can be defined as an application of knowledge, skills, tools, and techniques to meet the objective of the Project. It is the duty of a Project Manager to achieve the objective of the Project as per the specifications given by the client.
XYZ is a multinational corporation based in the US. Its manufacturing facilities are
located in Pittsburgh and hence its labor and
dollars (USD). A large fraction of its sales, however, are made to German customers who
pay for the goods in Deutschemarks (GDM). There is a six-month lead time between the
placement of a customer order and delivery of the product. XYZ's cost of production is
80% of the sale price. Suppose XYZ receives a $1MM GDM order and that the current
USD/GDM exchange rate is 0.60 (i.e. 1 GDM = 0.60 USD). The cost of production of this
order is $480,000 (0.60 x $1MM x 0.80). The exchange rate six months from now is, of
course, uncertain in which case XYZ is exposed to exchange rate risk.
Required
Explain how the company can use forward contract for hedging purposes
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