The income statement revealed that the manufacturing subsidiary and Japanese distribution segment are representing loss annually. The company should shut down its Japanese distribution and continue its ongoing manufacturing subsidiary as it supply goods to other subsidiaries that are making high profits. The company has to continue its manufacturing subsidiary as the profitability of other three subsidiaries depends upon its production. The Japanese subsidiary is showing loss of 10,500 that could harm the position of the company in the market. The company must shut down the Japanese subsidiary as the amount of loss is too high and it is not viable to continue the business of the subsidiary in Japan .
The currency conversion rate of one percent per transaction is too high. The company should get rid of it by applying multilateral netting. Multilateral netting refers to the approach that settles the account balances of different subsidiaries that are working in different countries to eliminate the difference of currency between them. BLP has five different subsidiaries in different countries and it always make accounts in Euro .
The company must not give up its policy rather than it must continue making accounts in Euro. The requirement is to apply multilateral approach that will eliminate the conversion cost. Suppose the British distribution is liable to pay Euros 2,600 to the Japanese distribution and Japan distribution is liable to pay Euros 2,700 to BLP manufacturing subsidiary. The manufacturing subsidiary must receive the balance of Euro 2,700 from the Japanese distribution and settle of the accounts of the required subsidiaries payments. In this way the remaining amount of Euros 100 will be liable from the British distribution. Similarly, they could settle of the accounts by transferring direct payments to the external suppliers that are located in other subsidiary’s country.
The approach is viable even if it costs Euros 400 to the company as the conversion cost is too high so the company must analyze opportunity cost that is 1 percent per transaction. The approach would allow the company to reduce the cost and increase its profitability. The chain would save substantial amount for the company and the company would be able to bear less cost of the currency conversion. In this way many subsidiaries could settle out their mutual invoices. The approach is viable in all sense as it would remove the unnecessary transactions that has high rate of taxes on it. The company must take needful step to overcome the situation.
The situation would be favorable for the BLP as it always maintains its financial accounts in Euro. The situation will benefit the company as the matter of conversion of currency will be eliminated from the process. All the dealings would be done in the single currency and there would be no issue of transferring other currency within the subsidiaries of the company. It should be noted that the situation will also benefit subsidiaries as they do not have to bear cost of conversion and in this way they could reduce their cost and increase profitability.
Another effect could be seen in the strategy that would result in extra cost to the company. Although it was preferable at the time when there was a situation of conversion cost, it is not viable for the situation in which there is a case of single currency. All the dealings would be done in single currency that means no cost of conversion will be applied on the transaction. The strategy would then result in extra cost so the benefits could not be derived on it. However, other benefits like saving the time and rolling of currency would be reduce to some extent. The strategy will lead the company to bear extra cost of Euros 400 that is not favorable for the company and its subsidiaries. The company could get more benefits by investing the same amount in other strategy or project and increase its business in other parts of the world.
Works Cited
Griffin, Ricky W. and Mike W. Pustay. International Business: A Managerial Perspective, Student Value Edition. New Jersey: Prentice Hall, 2014.
