Situation A small Canadian company has contracted to purchase 100,000 toys for £
ID: 430716 • Letter: S
Question
Situation
A small Canadian company has contracted to purchase 100,000 toys for £ 3.50 each from a British toy manufacturer. The Canadians have agreed to pay in pounds sterling. The Canadians have also agreed to sell the toys to a US company for $5.50 US per toy. The Canadian company has agreed to accept US dollars but plans to convert these revenues to Canadian dollars. The Canadian company estimates its marginal costs for warehousing, distribution, etc. is C$.75 per toy.
5. What impact on profits does the following exchange have on the Canadian company's profits using the rates below? Is this a good deal for the Canadians? Why or why not? Support your answers by showing calculations and currency amounts.
CAD $ Equivelant Currency per CAD $
Country(Canada)/currency rate at the UK .51 .7544
US $ Equivelant Currency per US $
Country(US)/currency rate at Canada 1.11 .90
Explanation / Answer
Since, Canadian company needs to pay 350000 pounds sterling to British manufacturer. And for 1 Canadian dollar, it can buy 0.57 pounds sterling. Therefore, to pay British manufacturer 350000 pounds sterling, the Canadian Company will need 350000/0.51 (686274.50) Canadian dollars.
Since, Canadian company gets 550000 US$ in revenues. And for 1 US$, it can get 0.9 Canadian dollars. Therefore, Canadian company revenues in Canadian dollars will be = 550000*0.9 = 495000 Canadian Dollars.
Total marginal costs = 75000 Canadian Dollars.
Total payment to British manufacturer = 686274.50 Canadian dollars
Adding the two, we get 75000+686274.50 = 761274.50Canadian dollars
Total revenues = 495000 Canadian dollars.
Therefore, Canadian company will make a net loss of 495000-761274.50 = - 266274.50 Canadian dollars.
Therefore, this is not a good deal.