A U. S.-based company, Global Products Inc., has wholly owned subsidiaries across the world. Global Products Inc. sells products linked to major holidays in each country. The president and board members of Global Products Inc. believe that the managers of their wholly owned country-level subsidiaries are best motivated and rewarded with both annual salaries and annual bonuses. The bonuses are calculated as a predetermined percentage of pretax annual income.
Senora Larza, the president of Global Products of Mexico, has worked hard this year to make her Mexican subsidiary profitable. She is looking forward to receiving her annual bonus, which is calculated as a predetermined percentage of this year’s pretax annual income earned by Global Products of Mexico. A condensed income statement for Global Products of Mexico for the most recent year is as follows (amounts in thousands of pesos):
Sales MXN 20,000
Expenses 19,000
Pretax Income MXN 1,000
The U. S. headquarters financial group translates each of its wholly owned subsidiary’s results into U. S. dollars for evaluation. After translating the Mexican pesos income statement into U. S. dollars, the condensed income statement for Global Products of Mexico is as follows (amounts in thousands of dollars):
Sales US $6,000
Expenses 6,600
Pretax Income US $(600)
a-1. Calculate the bonus amount based on (1) the Mexican pesos-based Pretax Income and (2) the U. S. dollar-based Pretax Income. The predetermined percentage for the calculation of Bonus is 15%.
a-2. Translate the pesos-based bonus to U. S. dollars using a current exchange rate in Exhibit 15-7.(Round your answer to 2 decimal places.)
b. Calculate the average exchange rate used to translate the Mexican pesos income statement into the U. S. dollar statement for the categories: (1) Sales and (2) Expenses. (Round your answers to 5 decimal places.