Question

B. Please read the brief description and respond to the questions. Please be clear and specific. Check your work as this is not an easy problem. Situation: A small Canadian company has contracted to purchase 200,000 toys for 3.50 British pounds each, from a British company. The Canadians have agreed to pay for the toys in British pound sterling. The Canadians have also agreed to sell the toys to a U.S. company for USD$ 5.50 per toy. The Canadian company has agreed to accept U.S. dollars from the U.S. sales but plans to convert these revenues to Canadian dollars. The Canadian company estimates its marginal (additional cost per unit) costs (warehousing, insurance, transportation, and so on) as an additional Cnd$.75 per toy. Exchange rates at the time of signing the agreements are as follows: Cnd$ 1 = USD$ .68 Cnd$ 1 = British pound .54 Questions:

1. On the line below indicate whether the firm earned a profit or loss from this deal and what was the dollar amount of the profit or loss in total. (Clearly state if a profit or loss was earned, what it was in total (not per unit) and show profit or loss calculation clearly with labels in space below)
_________Place word profit or loss on line.
_________Place amount on line. Show work clearly below: 2. a) What impact would a depreciation of the U.S. dollar relative to the Canadian dollar have on the Canadian company’s profits/loss? You must look at the impact on Revenue and/or Costs for # 2,3, and 4. (chose increase profit, increase loss, decrease profit, decrease loss, or no change and place on line below) _________Ans. Why?

3. a) What impact would a depreciation of the British pound relative to the Canadian dollar have on the Canadian company’s profit/loss? (increase profit, decrease profit, increase loss, decrease loss, or no change on line below) ____________Ans. Why?
4. a) What impact would a depreciation of the British pound relative to the U.S. dollar have on the Canadian company’s profit/loss? ((increase profit, decrease profit, increase loss, decrease loss, or no change on line below) ____________Ans. Why?
5. If exchange rates changed to the exchange rate shown below, state/show the amount of the Canadian company’s total profit or loss on the deal now? (Show profit or loss calculation clearly). Cnd$ 1 = USD$ .64 Cnd$ 1 = British pound .40 _________Place word profit or loss on line. _________Place amount on line. Show work clearly below:

Answer 1

(1) Current Exchange Rates: 1 C $ = 0.68 $ and 1 C $ = 0.54 pound

Number of toys bought = 200000, Sourcing Cost = 3.5 pound per unit and Sale Price = $ 5.5 per unit

Cost in C $ = 200000 x 3.5 x (1/0.54) = 1296296.296 C $

Cost in $ = 1296296.296 x 0.68 = $ 881481.48

Revenue in $ = 200000 x 5.5 = $ 1100000

Profit in $ = 1100000 - 881481.48 = $ 218518.52

(2) A depreciation of the US $ with respect to the C $ would mean that more units of the fomer would be purchasable for the same amount of C $, thereby expanding the firm's costs in $. The revenue being $ denominated will remain constant. Therefofe, profit will decrease.

(3) A depreciation of the British Pound with respect to the C $ would entail lower costs of sourcing the toys from Britain, The Revenue would remain constant owing to it being $ denominated. Therefore, the $ profit of the company would increase.

(4) 1 C $ = 0.68 $ and 1 C $ = 0.54 pound which implies 1 $ = 0.54 / 0.68 = 0.79 pounds

A depreciation of the pound relative to the $ would entail that pound amount greater than 0.79 will be purchasable for 1 $ in the future, thereby reducing the pound denominated costs in $ terms. The revenue would remain cosntant owing to it being $ denominated. Therefore, the profit in $ terms would increase.

NOTE: Please raise a separate query for the solution to the last sub-part.