Pricing and Profits Following Brexit Devaluation

Brief-Case Discussion Memo 1: Case Questions
Molto Delizioso: Pricing and Profits Following Brexit Devaluation

1. Recalculate the income statement shown in case Exhibit 1* using the post-Brexit exchange rate of
   £1.00= €1.161
   , assuming that there are no change in prices charged by the company toU.K. buyers.
   Assume that fixed costs remain fixed and variable costs vary proportionally to volume or
   quantity sold. Calculate profit in both pounds and euros. Please show all your work.
2. Recalculate the income statement shown in case Exhibit 1 using the post-Brexit exchange rate of
   £1.00 = €1.16, assuming that the U.K. subsidiary increases its price to U.K. buyers to £235 per unit.
   Assume that fixed costs remain fixed and variable costs vary proportionally to volume or quantity
   sold. Assume that U.K. purchasers’ consumer behavior is somewhat elastic and that market
   research suggests their elasticity = 1.1. Using the simple price elasticity formula (see p.3), calculate
   profit in both pounds and euros. Please show all your work.
3. Recalculate the income statement shown in case Exhibit 1 using the post-Brexit exchange rate of
   £1.00= €1.16, assuming that the U.K. subsidiary increases its price to U.K. buyer sto £235 per unit.
   Assume that fixed costs remain fixed and variable costs vary proportionally to volume or quantity
   sold. Assume that U.K. purchasers’ consumer behavior is somewhat elastic and that market
   research suggests their elasticity = 0.8. Using the simple price elasticity formula (see p. 3), calculate
   profit in both pounds and euros. Please show all your work.
4. Which of the three options should Montague choose? Under what assumption(s), would your
   suggested option work for Montague?
   Reference(s): Any work that you cite in your discussion above should appear in your References
   section “including the case.”
   Appendix: If you wish to add Excel spreadsheets, please use Appendix.
   *Notes for case Exhibit 1
   • Sales: quantity sold (variable)
   • Variable costs (Contract Labor, Import Cost of Coffee Machines) are costs that change as the
   quantity of the good or service that a business produces changes. Thus, variable costs will vary
   depending on the number of units that a business produces.
   • Fixed costs are business expenses that are not dependent on the level of goods or services
   produced by the business.
   • Profit = Sales - Costs
   1 £ = GBP = United Kingdom pound; € = euro; currency amounts are in £ unless otherwise specified;
   US$1.00 = £0.77 on July 6, 2016; US$1.00 = €0.90 on July 6, 2016.