Consider Belgian Lace Products (BLP), a hypothetical table linens manufacturer. BLP consists of a parent corporation, a wholly owned manufacturing subsidiary in Belgium, and four wholly owned distribution subsidiaries in Belgium, the United Kingdom, Japan, and the United States. Its manufacturing subsidiary buys inputs from various suppliers, manufactures high-quality lace napkins and tablecloths, and sells the output to the four BLP-owned distribution subsidiaries. The four distribution subsidiaries in turn sell the products to retail customers in the subsidiariesâ€™ marketing areas. The distribution subsidiaries buy certain inputs, such as labor, warehouse space, electricity, and computers, from outside suppliers as well.
Â Â Â Â Â Â Â Â Â Â Â Â The following summarizes typical monthly transactions for each of the BLP operating units (note that the symbol for the euro is â‚¬):
Sales to Belgian distribution subsidiary: â‚¬15,000
Sales to British distribution subsidiary: â‚¬12,500
Sales to Japanese distribution subsidiary: â‚¬17,500
Sales to U.S. distribution subsidiary: â‚¬ 11,250
Costs of inputs purchased from Belgian suppliers: â‚¬7,500
Costs of inputs purchased from British suppliers: Â£25,000
Costs of inputs purchased from Japanese suppliers: Â¥3,000,000
Costs of inputs purchased from U.S. suppliers: $5,000
Belgian Distribution Subsidiary
Sales to retail customers: â‚¬ 50,000
Payments to BLP manufacturing subsidiary: â‚¬15,000
Payments to external suppliers: â‚¬750 and Â£10,000
British Distribution Subsidiary
Sales to retail customers: Â£75,000
Payments to BLP manufacturing subsidiary: â‚¬12,500
Payments to external suppliers: Â£5,000, â‚¬1,000, andÂ $9,000
Japanese Distribution Subsidiary
Sales to retail customers: Â¥5,000,000
Payments to BLP manufacturing subsidiary: â‚¬17,500
Payments to external suppliers: Â¥3,000,000 and $8,000
U.S. Distribution Subsidiary
Sales to retail customers: $40,000
Payments to BLP manufacturing subsidiary: â‚¬11,250
Payments to external suppliers: $10,000 and Â¥300,000
Â â‚¬1.33 = Â£1
â‚¬1 = $1.00
â‚¬1 = Â¥120
Use the preceding information to answer the following questions:
1. Calculate the profitability of each of BLPâ€™s five subsidiaries. (Because BLP is Belgian, perform the calculations in terms of euros, which Belgium beganÂ using as its national currency in 2002.) AreÂ any of the subsidiaries unprofitable? On the basis of the information provided, would you recommend shuttingÂ down an unprofitable subsidiary? Why or why not?
2. Suppose it costs each subsidiary 1 percent of the transaction amount each time it converts its home currency into another currency to pay its suppliers. Develop a strategy by which BLP as a corporation canÂ reduce its total currency conversion costs. SupposeÂ your strategy costs BLP 400 euros per month to implement. Should the firm still adopt yourÂ approach?
3. If the United Kingdom decided to join the European Unionâ€™s single-currency bloc and use the euro, whatÂ effect would this have on BLP? What effect would it have on the benefits and costs of the strategyÂ you developed to reduce BLPâ€™s currency conversion costs?