Concept explainers
Ignoring taxes, what are East Coast Yachts’ projected gains or losses from this proposed arrangement at the current exchange rate of $1.34/€? What will happen to profits if the exchange rate changes to $1.25/€? At what exchange rate will the company break even?
To calculate: The profit and loss and break even of company.
Exchange rate
Exchange rate defines the value of one country’s currency against the other country’s currency. Exchange rate has two main components, namely domestic currency and foreign currency.
Explanation of Solution
Calculation of production cost:
Given,
Total sales €8,000,000
Exchange rate $1.34/€
Formula to calculate total production:
Substitute €8,000,000 for total sales and $1.34/€ for Exchange rate.
Hence, total sales is $10,720,000
Calculate production cost:
Given,
Total sales $10,720,000
Total spending by the company on production cost is 80%
Formula to calculate production cost:
Substitute $10,720,000 for Total sales and 80% for total spending by the company on production cost,
Hence, the production cost is $8,576,000.
Production cost remains constant irrespective of the exchange rate.
Calculate profit with the exchange rate of $1.34/€:
Given,
Total sales €8,000,000
Commission rate is 5%
Formula for commission on sales is,
Substitute €8,000,000 for Total sales and 5% for Commission rate,
Therefore, commission on sales is €400,000.
Calculate sales after commission:
Given,
Total sales is €8,000,000
Commission on sales is €400,000
Formula to calculate sales after commission:
Substitute €8,000,000 for Total sales and €400,000 for Commission on sales
Hence, sales after commission are €7,600,000.
Calculation of sales after commission in dollars:
Given,
Sales after commission is €7,600,000.
Exchange rate is $1.34/€.
Formula to calculate sales after commission in dollars:
Substitute €7,600,000 for Sales after commission and $1.34/€ for Exchange rate,
Hence, sales after commission is $10,184,000.
Calculation of profit in dollars
Given,
Sales after commission in dollars is $10,184,000,
Production cost is $8,576,000,
Formula to calculate profits in dollars:
Substitute $10,184,000 for Sales after commission in dollars and $8,576,000 for Production cost,
Hence, profit in dollars is $1,608,000.
Calculate of profit with exchange rate of $1.25/€:
Given,
Total sales €8,000,000.
Commission rate is 5%.
Formula for commission on sales:
Substitute €8,000,000 for Total sales and 5% for Commission rate.
Therefore, commission on sales is €400,000.
Calculation of sales after commission:
Given,
Total sales is €8,000,000
Commission on sales is €400,000
Formula to calculate sales after commission:
Substitute €8,000,000 for Total sales and €400,000 for Commission on sales.
Hence, sales after commission are €7,600,000.
Calculation of sales after commission in dollars:
Given,
Sales after commission is €7,600,000
Exchange rate is $1.25/€
Formula to calculate sales after commission in dollars,
Substitute €7,600,000 for Sales after commission and $1.34/€ for Exchange rate,
Therefore, sales after commission in dollars are $9,500,000.
Calculate profit in dollars:
Given,
Sales after commission in dollars is $9,500,000.
Production cost is $8,576,000.
Formula to calculate profits in dollars,
Substitute $9,500,000 for Sales after commission in dollars and $8,576,000 for Production cost,
Hence, profit in dollars is $924,000.
Therefore, when the exchange rate changes to $1.25/€the profit of the company will automatically decrease.
Calculate the break- even exchange rate:
Given,
Production cost in dollars is $8,576,000.
Sales after commission in euro is €7,600,000.
Formula to calculate break-even exchange rate:
Substitute $8,576,000 for production cost in dollars and €7,600,000 for Sales after commission in euro,
Hence, the break even exchange rate is $1.128/€.
If the exchange rate shifts from $1.34/€ to $1.25/€, the company will observe a decline in their profits. The company will break even at the exchange rate of $1.128/€.
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Chapter 31 Solutions
CORPORATE FINANCE(LL)
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning