Chapter 15, Problem 1BP

a.

To determine

State the estimated profit/loss in Danish Kroner if Company M exports the batch to the Country U.S

Explanation of Solution

Exchange rate: The costs incurred to purchase one unit of currency with another currency

Calculate the estimated profit/loss in Danish Kroner:

Profit/loss if sold to Country U.S.	Amount in Kr.
Total sales revenue in Danish kroner (2)	37,500
Materials and labour costs	(9,000)
Shipping costs in kroner (3)	(17,500)
Miscellaneous costs in kroner (4)	(2,625)
Amount of Profit in Danish kroner	8,375

Table (1)

Working note:

Calculate the dollar per Danish kroner exchange rate:

$\begin{array}{c}\begin{array}{l}\text{Dollar per Danish}\\ \text{Kroner}\text{exchnage}\text{rate}\end{array})\text{=}\frac{\text{one}\text{Krone}}{\text{Number}\text{of}\text{krone}\text{per}\text{dollar}}\\ \text{=}\frac{\text{1}\text{Krone}}{\text{\$0}\text{.16}}\\ \text{=}\text{6}\text{.25}\text{kroner/dollar}\end{array}$ (1)

Calculate the total sales revenue in Danish Kroner:

$\begin{array}{c}\begin{array}{l}\text{The}\text{total}\text{sales}\text{revenue}\\ \text{in}\text{Danish}\text{Korner}\end{array})\text{=}\left(\begin{array}{l}\text{Total}\text{sales}\text{revenue}\text{in}\text{Country}\text{U}\text{.S}\text{dollars}\text{×}\\ \text{Exchange}\text{rate}\text{in}\text{danish}\text{kroner}\end{array}\right)\\ \text{=\$6,000×}\text{6}\text{.25}\text{kroner}\text{/}\text{dollars}\text{(1)}\\ \text{=}\text{Kr}\text{.}\text{37,500}\end{array}$ (2)

Calculate the shipping costs in Danish Kroner:

$\begin{array}{c}\begin{array}{l}\text{The}\text{shipping}\text{costs}\text{in}\\ \text{Danish}\text{Korner}\end{array})\text{=}\left(\begin{array}{l}\text{Shipping}\text{costs}\text{in}\text{CountryU}\text{.S}\text{dollars}\text{×}\\ \text{Exchange}\text{rate in}\text{danish}\text{kroner}\end{array}\right)\\ \text{=\$2,800×6}\text{.25kroner/dollars}\text{(1)}\\ \text{=Kr}\text{.}\text{17,500}\end{array}$ (3)

Calculate the miscellaneous costs in Danish Kroner:

$\begin{array}{c}\begin{array}{l}\text{The}\text{miscellaneous}\text{costs}\\ \text{in}\text{Danish}\text{Korner}\end{array})\text{=}\left(\begin{array}{l}\text{Miscellaneous}\text{selling}\text{expenses}\text{×}\\ \text{Exchange}\text{rate}\text{in}\text{danish}\text{korner}\end{array}\right)\\ \text{=\$420}\text{×}\text{6}\text{.25}\text{kroner/}\text{dollars}\text{(1)}\\ \text{=Kr}\text{.2,625}\end{array}$ (4)

Note: Unit of Danish Kroner is Kr.

The estimated profit in Danish Kroner is 8, 375.

Conclusion

The estimated profit in Danish Kroner is 8, 375.

b.

To determine

State the estimated profit/loss in Danish Kroner if Company M exports the batch to the Country B.

Explanation of Solution

Exchange rate: The costs incurred to purchase one unit of currency with another currency

Calculate the estimated profit/loss in Danish Kroner:

Profit/ loss if sold to Country B:	Amount in Kr.
Total sales revenue in Danish kroner (6)	28,886
Materials and labour costs	(9,000)
Shipping costs in kroner (7)	(11,875)
Miscellaneous costs in kroner (8)	(5,555)
Amount of profit in Danish kroner	2,456

Table (1)

Working note:

Calculate the pound per Danish kroner exchange rate:

$\begin{array}{c}\begin{array}{l}\text{Pound per Danish}\\ \text{Kroner}\text{exchnage}\text{rate}\end{array})\text{=}\frac{\text{one}\text{Krone}}{\text{Number}\text{of}\text{krone}\text{per}\text{pound}}\\ \text{=}\frac{\text{1}\text{Krone}}{\text{0}\text{.09}\text{pound}}\\ \text{=}11.11\text{kroner/pound}\end{array}$ (5)

Calculate the total sales revenue in Danish Kroner:

$\begin{array}{c}\begin{array}{l}\text{The}\text{total}\text{sales}\text{revenue}\\ \text{in}\text{Danish}\text{Korner}\end{array})\text{=}\left(\begin{array}{l}\text{Total}\text{sales}\text{revenue}\text{in}\text{Country}\text{B}\text{pounds}\text{×}\\ \text{Exchange}\text{rate}\text{in}\text{danish}\text{kroner}\end{array}\right)\\ \text{=}\text{2,600 pounds×}11.11\text{kroner}\text{/}\text{pounds}\text{(5)}\\ \text{=}\text{Kr}\text{.}28,886\end{array}$ (6)

Calculate the shipping costs in Danish Kroner:

$\begin{array}{c}\begin{array}{l}\text{The}\text{shipping}\text{costs}\text{in}\\ \text{Danish}\text{Korner}\end{array})\text{=}\left(\begin{array}{l}\text{Shipping}\text{costs}\text{in}\text{Country B dollars×}\\ \text{Exchange}\text{rate in}\text{danish}\text{kroner}\end{array}\right)\\ \text{=\$1,900×6}\text{.25}\text{kroner/dollars}\text{(1)}\\ \text{=Kr}\text{.}\text{11,875}\end{array}$ (7)

Note: The shipping costs of Country B are directly converted in to dollars of Country U.S in this case.

Calculate the miscellaneous costs in Danish Kroner:

$\begin{array}{c}\begin{array}{l}\text{The}\text{miscellaneous}\text{costs}\\ \text{in}\text{Danish}\text{Korner}\end{array})\text{=}\left(\begin{array}{l}\text{Miscellaneous}\text{selling}\text{expenses}\text{×}\\ \text{Exchange}\text{rate}\text{in}\text{danish}\text{korner}\end{array}\right)\\ \text{=500}\text{pounds}\text{×}11.11\text{kroner/}\text{dollars}\text{(5)}\\ \text{=Kr}\text{.5,555}\end{array}$ (8)

Note: Unit of Danish Kroner is Kr.

Conclusion

The estimated profit in Danish Kroner is 2,456.

c.

To determine

Ascertain the impact of Company M’s decision regarding its shipment to the country if the Country B pound has exhibited large fluctuations relative to the Danish kroner recently.

Explanation of Solution

• The level of realized profits is affected by the large fluctuations in exchange rates.
• Even though, the original estimates reports expectation of loss from exporting to Country B, a significant weakening of the Krone relative to the Pound could result in considerable higher profits.
• But, at current exchange rates, exporting to the Country U.S is more attractive.