Franny Flew and Tommy Trew own Tuxedo Air, based in Nanaimo, BC. They manufacture planes and are in discussions with a European dealer about selling their planes there.
Monthly sales would be estimated at 6.4 Euros and there would be a commission of 10%.
The planes would be paid for 90 days after the order is filled.
The current exchange rate is $1.57 Euro. (dollars Canadian) At this rate the company would spend 80% of sales on production costs. This doesn’t include the commission.
The owners have asked you to prepare the following analysis:
a. What are the pros and cons of international sales? What additional risks will the company face?
b. What will happen to the company’s profits if the Canadian dollar (CAD) strengthens? What if it weakens?
c. Ignoring taxes, what are the expected gains or losses from this proposal at the current exchange rate?
d. What will happen to profits is the exchange rate changes to $1.15 / Euro?
e. At what exchange rate will the company break even?
f. How could the company hedge its exchange rate risk? What are the implications of this approach?
g. Taking all factors into account, should the company pursue the international sales opportunity in Europe? Explain.