The Eagle sells for $98,000 and has a variable cost of $81,000 per airplane. Ama

Question

The Eagle sells for $98,000 and has a variable cost of $81,000 per airplane. Amalie Diefenbaker, the dealer, wants to add the Eagle to her current retail line. Amalie has told Mark and Todd that she feels she will be able to sell 15 airplanes per month in Europe. All sales will be made in euros, and Amalie will pay the compnay 75,384 euros for each plane. Amalie proposes that she order 15 aircraft today for the first month's sales. She will pay for all 15 aircraft in 90 days. This order and payment schedule will continue each month. In their discussion with Amalie, they found out that the current exchange rate is $1.30/euro. This means that they can convert the 75,384 euros prer airplane paid by Amalie to $98,000. Thus, this profit on the international sales is the same as the profit on dollar-denominated sales. answer the following questions. *Provide computations on all answers where needed 1. What are the pros and cons of the international sales? What additional risks will the company face? 2. What happens to the company's profits if the dollar strengthens? What if the dollar weakens? 3. Ignoring taxes, what are S&S Air's projected gains or losses from this proposed arrangement at the current exchange rate of $1.30/euro? What happens to profits if the exchange rate changes to $1.37/euro? At what exchange rate will the company break even?

Explanation / Answer

Answer 1: Pros and cons of international sales:

Pros of international Sales

Advantages for international sales to Eagle would be that it can Enhance its domestic competitiveness and thereby Reduce dependence on existing markets. Further it can extend sales potential of existing products in global market by enhancing potential for expansion its air business. There can be additional advantage of stabilizing seasonal market fluctuations or may be selling excess production capacity, if any. The most important advantage is that it can maintain cost competitiveness in its domestic market

Cons of international sales

Disadvantages of international sales to Eagle would be that they may need to wait for long-term gains and may be future they need to hire staff to cater to international sales and follow regulations for both countries. Another disadvantage would be incurring additional administrative costs for maintaining records of international transactions and complying with taxation laws. Deal with special licenses and regulations. Further as given in case the Eagle will sell for a credit of 90 months to Amalie so this would increase the interest cost. The biggest disadvantage of this agreement would be that all sales would be made in Euro which would add a risk to Eagle for foreign currency exchange loss due to any increase in the price of dollar.

Answer 2: Affect on company's profits if the dollar strengthens would be that Eagle would incur a exchange currency loss as it would have to sell collected Euros from sales at a lower price for dollars.

However if the dollar get weakens then there would be exchange currency gain on the transaction.

Answer 3

S&S Air's projected gains or losses from this proposed arrangement at the current exchange rate of $1.30/euro

Sales : (75384* 1.30 *15)                       1469988

Less Variable cost (81000*15)               1215000

Contribution                                             254988

Assuming this is no addition is required for current capacity and no additional fixed cost would be required the company would earn profit of $254988 per month.

Now, when exchange rate changes to $1.37/euro

Sales (75384 *1.37*15)                              1549141.20

Variable cost(81000*15)                             1215000

Contribution                                                334141.20           

Since Euro has strengthed from $1.30 to $1.37 so profits has increased by 79153.20.

Exchange rate on which company break even

At break even exchange rate point there would be no profit or no loss therefore variable cost equals sales.

Hence break even exchange rate = 81000$/75384Euro =1.0745

So when exchange rate is $1.0745/Euro there would be break even point.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.