Finances in Relation to International Business

Question: Discuss about theFinances in Relation to International Business. Answer: Requirement A: Columnar Statement of Financial Performance for Feb Next Year Please refer Excel Requirement B: Breakeven Sales Required for the Total Venture in Both Dollar and Volume Terms Please refer Excel Requirement C: Break Even Sales Required for London and Paris in both Dollar and Volume Terms Please refer Excel Requirement D: Margins of Safety for Paris, London and the Entire Operation Please refer Excel Requirement-E: Analysis of the Impact of Change in the Exchange Rates The exchange rates applied in preparing the statement of financial performance for the month of February 2015 were taken of the last day of the month. The exchange rate of pound sterling and AUD prevailing on February 28, 2015, was 1.97 AUD per pound and that of Euro and AUD was found to be 1.43 AUD. Now, if AUD appreciates, the rate of exchange will go down and vise a versa. In the current situation, AUD appreciates by 5% against pound sterling, while depreciates by 10% against Euro. The revised rates have been computed as under: New Exchange Rates () () Existing rate 1.97 1.43 Appreciated/ Depreciation 5% 10% New Exchange Rate to $A [$1.97*(1-5%)] 1.87 New Exchange Rate to $A [$1.97*(1+10%)] 1.57 Morasco Exporters is selling goods in Europe and UK. The manufacturing of goods is completed in Australia, thus, the substantial part of the costs is incurred in domestic currency. Therefore, the appreciations in AUD will affect the company adversely and vise a versa. In the light of this concept, the impact of change in the exchange rates on the profits and breakeven point is shown in the table presented below: Analysis of the impact of change in the exchange rate on the profits and breakeven point Before change After Change Net Change Reduced/Increased Favorable/Unfavorable Profit London -$146,169.73 -$149,631.75 -$3,462.02 Loss increased Unfavorable Paris -$155,899.31 -$150,390.94 $5,508.37 Loss reduced favorable Total operations -$302,069.05 -$300,022.69 $2,046.35 Loss reduced favorable Breakeven (Volume) London 6392 7223 831 Increased Unfavorable Paris 9448 7435 -2013 Reduced favorable Total operations 15250 14656 -595 Reduced favorable From the table presented above, it could be observed that the loss from the London operations has further increased because AUD got appreciated against pound sterling. Due, the appreciation in the AUD against pound sterling, the value of revenues from London went down, which increased the loss. In case of Paris, the impact on profit is positive as the losses are reducing due to change in the exchange rate. Due to depreciation of AUD against Euro, the value of revenues from Paris operations went up, which reduced the losses. Further, since the depreciation (10%) in AUD is greater than appreciation (5%), therefore, the impact on overall profits is also favorable. Overall, the losses of the company have been reduced by $2,046.35 due to change in the exchange rates. In respect of breakeven point, the impact in regard to London operation is unfavorable while the in regard to Paris operations, the impact has been perceived to be favorable. The breakeven point of London operations has gone up from 6,392 cases to 7,223 cases, whereas, the breakeven point of Paris operations have gone down from 9,448 cases to 7435 cases. The breakeven point from overall operations is also down from 15,250 cases to 14,656 cases. Requirement F: Comment on the Viability of the Venture At the current level of operations, where the company is selling one container to each London and Paris, the financial performance does not appear good. The company is incurring losses amounting to $302,069.05 in the month of February 2015. However, the profit volume (PV) ratios of both the operations such as London and Paris have been observed to be high. The PV ratio of London operations was 42.85% and that of Paris operations was found to be 32.54%. High PV ratios indicate the financial viability of the venture. Thus based on the high PV ratio, the venture of financially viable and the company can go ahead with it. However, the level of demand has to be increased in the upcoming months so that the breakeven point could be reached as soon as possible (Cafferky, 2010). Further, the role of exchange rate is also significant here in the evaluation of the financial viability of the venture (Wang, 2009). Morasco Exporters is an Australian company and considering selling goods in London and Paris. The depreciation in the value of Euro and pound sterling against the $A will affect the profitability of the company negatively. The economies of Europe and UK have been volatile in the recent years, thus, the company should adequately analyze the economic conditions of Europe and the UK in respect of this venture. References Cafferky, M. 2010. Breakeven analysis: the definitive guide to cost-volume-profit analysis. Business Expert Press. Wang, P. 2009. The economics of foreign exchange and global finance. Springer Science Business Media.