Question

A leading German tour operator sells package tours to Sri Lanka for British and German tourists. On January 1, 2016, tour operator sent its printed catalog to British and German travel agencies quoring price of £7,500 and 10,000EUR, respectively, valid throughout 2016 on their fortnight package tours to Sri Lanka. The cost incurred by tour operator, on a unit basis, is distributed as follows: 5,200EUR for administrative and travel costs and 13,00SRL (Sri Lankan rupees) for residential costs. The exchange rate is SRL 10 per EUR 1.

On August 15, 2016, the Euro is revalued by 15 percent vis-a-vis the British pound due to Brexit. However, because of earlier booking, the euro revaluation cannot be passed through before January 1, 2017.

Assuming that tour operator sells 500 trips every 15 days evenly divided between British and German, assess the impact of the Euro revaluation upon the profitability of tour operator in 2016.

Answer 1

The profitability of tour operator effect on the residential cost only reason rest of the cost like administrative and travel cost are accounted in germany only. the residencial cost to be accounted as per the exchange rate from EURO to Strilankan curency that is change to 15%.

So we have to calculate the 15% of the residential cost for 500 trips per 15days for 2016year.

Residential cost will be the same for german and british so.

500 trip both german and british made in every 15days

so 1000 trip made in a month (500*2)

so total 12000 trip made in the whole year 2016

Euro rates revalued on 15th August so there is change of pofitability effect only after 15th of August.

After the date tour operator sells 4500 trips (15th Aug-500, followed months 4*1000(500*2times))

Residential cost before rate chages is 1300SRL

130Euro (10SRL=1EURO)

Residential Cost after rate changes is 1300SRL

EURO rate changes 15% so exchange rate is 11.5SRL=1EURO (10+15%=11.5)

(10*15%=1.5 10+1.5=11.5)

Residential Cost in EURO is 1300/11.5= 113.04

Profitability per tourist is 16.96EURO (130-113.04)

Profitability for 4500 tourists is 76320EURO (4500*16.96)

Total EURO76320Euro is the profitability of the tour operator for 2016Year due to changes the exchange rates.