Essay about Farmington Industries

984 Words Dec 2nd, 2014 4 Pages
Farmington Industries
Case Write-Up

Farmington Industries is a small, publicly traded U.S.-based corporation, which produces programmable control instruments. With high interests in Mexico, the company has expanded to four Mexican-related businesses, which are listed below along with their specific function:

• The Maquiladora Assembly Facility – This facility is used to assemble imported U.S.-manufactured components into final products for sale mainly in the U.S. Seeing as the majority of sales occur in the U.S., this facility generates its revenues in USD.
• Farmington (Antilles) N.V. – This facility is an offshore “shell corporation” by which the U.S. parent exports U.S.-manufactured products to Mexico and other countries.
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The devaluation of this currency leads to lower costs for the subsidiary, in relation to wages, since the peso has depreciated against the USD during this time period. The facility can purchase Mexican pesos with their USD profits at increasingly appealing exchange rates, and then use these pesos to finance new operations. By doing so, this shows the positive effect of the devaluation of the peso for the Maquiladora Assembly Facility.

On the other hand, the peso devaluation will not have that much of a positive effect on Farmington (Antilles) N.V. as the peso depreciates relative to the USD. The result is the subsidiary being negatively impacted as the USD/peso exchange rate is rising, as they convert revenue earned in pesos to USD to deposit into U.S. bank accounts. This facility had almost 4 million MXN receivables at the end of the year. The 1994 average exchange rate is 3.5 MXN/USD, where these 4 million MXNs would equate to approximately 1.14 million USD. When the exchange rate values the devalued peso at 5.0 MXN/USD, these 4 million MXNs are only equal to 0.80 million USDs, showing a loss of more than 300,000 USDs. When the exchange rate changes from 4.0 to 5.0 MXN/USD, we can see the loss the company would experience, and thus the negative impact on this facility.

Farmington Industries was not very well prepared for the December 20, 1994 devaluation. Farmington Industries business model creates a hedge by billing the majority of their transactions