Question

Facts: (Note £=British Pound Sterling, C$=Canadian Dollar, U.S.$=United States Dollar)

• A small Canadian company has contracted to purchase 100,000 toys for £3.50 each from a British company. The Canadians have agreed to pay the Brits in pounds sterling (£).
• The Canadians have also agreed to then sell those toys to a U.S. company for US$5.50 per toy. The Canadian company has agreed to accept U.S. dollars but plans to convert these revenues to Canadian dollars.
• The Canadian company estimates its marginal costs (warehousing, travel, etc.) at C$0.75 per toy.
• Exchange Rates (xe.com) as of Saturday April 11, 2020:  Canadian $ 1 = U.S.$ 0.72 Canadian $ 1 = British £ 0.58

Hints/Suggestions:

• For questions 1 - 4, use the exchange rates given in the case facts. Do not research and use different rates.
• For question 5, note that only one rate has changed, the other is the same rate given in the case facts.
• Important definitions; (if you do not understand the distinctions between each of the following, please ask your instructor for clarification)
  • Cost = expenses associated with making and/or buying an item
  • Revenue = # of units sold X selling price
  • Price = amount you ask your customer to pay. Typically price = cost + hoped-for-profit
• For # 4 and 5.b., you might find it easier to do your calculations for ONE toy unit and then multiply that result by 100,000 units to complete your answer. #2 and 3 ask for "PER TOY", so do not multiple those answers by 100,000.
• Show your work, show your work, show your work! If you can't show it, explain what you did and why. No credit given if work is not shown/explained!

Questions: (copy/paste the questions below on to your reply and answer below each, SHOWING ALL WORK FOR ANY NUMBER NOT GIVEN TO YOU, round all answers to 2 decimal places)

1. Using the exchange rates listed above for 04/11/2020, can you correctly flip the rate by filling in the blanks below? (10 points)

U.S.$ 1.00 = Canadian $ ____

British £ 1.00 = Canadian $ ____

2. After purchasing the toys from the British company, what is the COST PER TOY in Canadian dollars, including marginal costs? (30 points)

3. After selling the toys in the U.S., what is the REVENUE PER TOY in Canadian dollars? (30 points)

4. In the end, what was the Canadian company's TOTAL PROFIT (+) or LOSS (-) in Canadian dollars? (10 points)

5. Assume the exchange rate between the Canadian dollar and US dollar changes to C$1 = US$0.82.  

A. At this new rate, has the US $ devalued or revalued relative to the Canadian $? Explain. (10 points)

B. What is the Canadian company's TOTAL PROFIT (+) or LOSS (-) in Canadian dollars using this new rate? (10 points)

Answer 1

1.

Canadian $ 1 = U.S.$ 0.72

Multiply by 1/0.72 on the both sides:

Canadian $ 1 x 1/0.72 = U.S.$ 0.72 x 1/0.72

Canadian $ 1.39 = U.S.$ 1

Canadian $ 1 = British £ 0.58

Multiply by 1/0.58 on both sides:

Canadian $ 1 x 1/0.58= British £ 0.58 x 1/0.58

Canadian $ 1.72 = British £ 1

U.S.$ 1.00 = Canadian $ 1.39

British £ 1.00 = Canadian $ 1.72

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2.

Canadian company has contracted to purchase 100,000 toys for £3.50 each from a British company.

The Canadian company estimates its marginal costs (warehousing, travel, etc.) at C$0.75 per toy.

Change £3.50 into Canadian $:

British £ 1.00 = Canadian $ 1.72

Multiply both sides by 3.50

British £ 1.00 x 3.50= Canadian $ 1.72 x 3.50

British £ 3.50 = Canadian $ 6.02

Cost = Purchase cost in Canadian dollar x quantity + MC x Quantity

Cost =Canadian $6.02 x 100000 + Canadian $0.75 x 100000= Canadian $677000

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3.

The Canadians have also agreed to then sell those toys to a U.S. company for US$5.50 per toy.

Change in selling price from US $ to Canadian $:

U.S.$ 1.00 = Canadian $ 1.39

Multiply both sides by 5.50:

US $5.50 = Canadian $7.65

Revenue= Quantity x selling price in Canadian $

Revenue= 100000 x 7.65= Canadian $765000

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4.

Total profit= Revenue - Cost

Total profit = 765000 - 677000= Canadian $88000

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5.

A.

Initial Exchange rate:

Canadian $ 1 = U.S.$ 0.72

It implies that it requires US $0.72 to buy a Canadian $.

Now Assume the exchange rate between the Canadian dollar and US dollar changes to C$1 = US$0.82

It implies that now US $0.82 required to buy a Canadian $. From the initial situation now more US $ required to buy same quantity of Canadian $ it means that value of Canadian $ increases or value of US $ decreases.

So At this new rate, has the US $ devalued relative to the Canadian $.

B.

New exchange rate:

C$1 = US$0.82

Multiply both sides by 5.50/0.82

C$1 x 5.50/0.82 = US$ 5.50

C$ 6.71 = US$ 5.50

New Revenue= 6.71 x 100000= C$ 671000

Canadian company's TOTAL PROFIT= C$ 671000 - C$ 677000= -C$ 6000