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Using the data from Extract F, assess the impact of the exchange rate movements between January 2019 and April 2019 on the total costs of a business, such as Tropicana, which imports to the USA from Brazil. - Edexcel - A-Level Business - Question 2 - 2022 - Paper 1
Question 2
Using the data from Extract F, assess the impact of the exchange rate movements between January 2019 and April 2019 on the total costs of a business, such as Tropica... show full transcript
Worked Solution & Example Answer:Using the data from Extract F, assess the impact of the exchange rate movements between January 2019 and April 2019 on the total costs of a business, such as Tropicana, which imports to the USA from Brazil. - Edexcel - A-Level Business - Question 2 - 2022 - Paper 1
Step 1
Assessing the Exchange Rate Movement
Answer
Between January 2019 and April 2019, the Brazilian Real experienced fluctuations in its exchange rate against the US dollar. This impact is significant for businesses like Tropicana, which relies on imports from Brazil for its operations. The appreciation or depreciation of the Real would directly influence the costs incurred by Tropicana for the goods it imports.
In January 2019, the exchange rate was relatively stable, but by April 2019, the rate showed signs of depreciation. This would mean that for every Real spent, Tropicana would need to convert more dollars, ultimately escalating their costs of goods imported from Brazil.
Step 2
Impact on Tropicana's Costs
Answer
If the exchange rate fluctuates from a value of approximately R3.8 between January and April 2019, it signifies that Tropicana would face a higher cost per unit of imported goods.
For instance, if Tropicana imports oranges that were priced at R$100 in Brazil, the cost in US dollars would be:
- At R$4.0: rac{100}{4.0} = 25 ext{ USD}
- At R$3.8:
rac{100}{3.8} ext{ USD} ext{ (approximately 26.32 USD)}
This increase in cost could affect Tropicana's pricing, profitability, and overall market competitiveness.
Step 3
Potential Counterbalance Considerations
Answer
While exchange rate fluctuations typically increase costs, it is also essential to consider how much of Tropicana's costs relate directly to these imports. If a substantial proportion of their operational costs come from imported goods like oranges, then the impact will be more pronounced. However, if they source a significant portion locally, the overall effect on their cost base might be minimized.
Additionally, capitalizing on currency hedging could alleviate some of the adverse effects of exchange rate volatility.
Step 4
Judgment on Overall Impact
Answer
In conclusion, the exchange rate fluctuations between January and April 2019 likely resulted in increased costs for Tropicana due to the need for more dollars to buy the same quantity of imported products. The long-term implications will depend on their ability to manage these costs through strategic sourcing and possibly passing on some of the cost increases to consumers.
Given the competitive landscape in the beverage market, Tropicana needs to monitor these fluctuations closely to make informed financial decisions.