Question

Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate?

Answer 1

Answer:

12.18%

Explanation:

Company selling price in US = $55,000

(which is equal to price with 20% margin)

= 27,363 pounds × $2.01

= $55,000

Now the exchange rate increased to $2.15 per pound,

so here the manufacturing cost of the car will increase according to the increase in the exchange rate.

The selling price remains constant, then the profit margin is as follows;

Manufacturing cost of the car = 22,803 pounds × $2.15

                                                  = $49,026.45

Selling price = $55,000

Profit margin:

= Selling price - Manufacturing cost

= 55,000 - 49,026

= $5,973.55

Margin percentage = Profit margin ÷ Manufacturing cost of the car

                                = $5,973.55 ÷ $49,026.45

                                = 12.18%