An automobile company in Gujarat exports its goods to Singapore at a price of SG$ 500 per unit. The company also imports components from Italy and the cost of components for each unit is € 200. The company’s CEO executed an agreement for the supply of 20000 units on January 01, 2010 and on the same date paid for the imported components. The company’s variable cost of producing per unit is Rs. 1,250 and the allocable fixed costs of the company are Rs. 1,00,00,000.

The exchange rates as on 1 January 2010 were as follows-

Mr. A, the treasury manager of company is observing the movements of exchange rates on a day to day basis and has expected that the rupee would appreciate against SG$ and would depreciate against €.

As per his estimates the following are expected rates for 30th June 2010.

You are required to find out:

• The change in profitability due to transaction exposure for the contract entered into.
• How many units should the company increases its sales in order to maintain the current profit level for the proposed contract in the end of June 2010.

Solution

• Let us first calculate the Company’s existing profits

After the Rupee appreciation against SG$ and depreciation against €, the company’s profitability will be

Thus profit   will   decrease   by   Rs. 11,540,000   (Rs. 68,760,000   –   Rs. 57,220,000)

• Let the number of units that need to be sold for keeping the profits at pre appreciation level be X.

Then                                                

Rs.68,760,000 = [500 × Rs. 32.15 × X] – [(1250 × X) + (200 × 57.32X) + 10,000,000] 68,760,000 = [16075X – (1250X + 11464X + 10,000,000)]

68,760,000 =[500 × Rs. 32.15 × X] – [(1250 × X) + (200 × 57.32X) + 10,000,000] 68,760,000 = [16075X – (1250X + 11464X + 10,000,000)]

68,760,000 + 10,000,000= 16075X – 12714X

78,760,000 = 3361X

X = 23433.50 or, 23434 units.

Thus, the company should increase its existing supply from 20000 to 23434 to maintain the current profit level of Rs. 68,760,000.

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