Tompkins Inc. is a U.S.-based multinational company that produces office phones
ID: 2722038 • Letter: T
Question
Tompkins Inc. is a U.S.-based multinational company that produces office phones in France and sells its products in England. On average, Tompkins can produce phones at a cost of 18 euros per unit, and it sells the phones at a price of pound 14 per unit. The following table shows the direct exchange rate quotations (in American terms) for the euro and the British pound. What per-unit dollar profit does Tompkins earn for each phone? $3.50 $4.24 $5.47 $6.08 $6.91 Suppose the dollar depredates relative to the British pound, but its value remains stable relative to the euro. What would you expect to happen to the firm's dollar profit per unit? The dollar profit per unit would decrease. The dollar profit per unit would stay the same. The dollar profit per unit would increase.Explanation / Answer
Profit = Sale price- cost
Cost in terms of $= 18*1.2425= $22.36
Sale price in terms of $= 14*1.8472=$25.86
Profit=25.86-22.36
Profit=$3.5
Now suppose dollar depreciated relative to pound means more dollars will be exchanged for same amount of pounds. Thus sale price will increase and hence dollar Profit will increase.