Question

A company that manufactures and sells tricycles around the world just completed a sale of 3,000 units to a chain of stores in Sweden at a contracted price of 375 krona per tricycle, with payment to be received in 90 days. The exchange rate today is 7.5 krona per dollar but it unexpectedly moves to 7.7 at the time of the payment. What is the fall in domestic revenue due to this move in the exchange rate?

Answer 1

Solution:

As per the information given in the question we have

No. of contracted sales units = 3,000

Contracted price per tricycle in Krona = 375 Krona

Present day exchange rate = 7.5 krona per dollar

Exchange rate at the time of payment = 7.7 krona per dollar

Calculation of total amount receivable in dollars at the present day exchange rate:

The Total amount receivable in dollars = ( Sales units * Contracted price per tricycle in Krona) / Present day exchange rate per dollar

= ( 3,000 * 375 ) / 7.5

= 1125000 / 7.5

= 150,000

The Total amount receivable in dollars at present day exchange rate = $ 150,000

Calculation of total amount receivable in dollars at the exchange rate on the payment date :

The Total amount receivable in dollars = ( Sales units * Contracted price per tricycle in Krona) / Exchange rate at the time of payment per dollar

= ( 3,000 * 375 ) / 7.7

= 1125000 / 7.7

= 146,103.90

The Total amount receivable in dollars at the exchange rate on payment date = $ 146,103.90

Calculation of the fall in domestic revenue due to this move in the exchange rate:

The calculation of the fall in domestic revenue due to the change in exchange rate is

= Total amount receivable in dollars at the exchange rate on payment date - Total amount receivable in dollars at present day exchange rate

= $ 146,103.90 - $ 150,000

= $ 3,896.10

Thus the fall in domestic revenue due to this move in the exchange rate = $ 3,896.10