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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
Impact of Exchange Rate Movements
Answer
Between January 2019 and April 2019, the exchange rate of the Brazilian Real (BRL) to the US Dollar (USD) showed fluctuations. An appreciation of the US dollar against the Brazilian Real would mean that US importers, such as Tropicana, would face higher costs for their Brazilian imports. If, for example, the exchange rate moved from approximately R4.0, this indicates that it took more Reais to buy the same amount of dollars, which could significantly impact costs.
Specifically, if Tropicana imports juice from Brazil, the higher exchange rate means that the cost of oranges, which might form a significant part of their production costs, can increase. This situation that arose during that period could encompass factors such as increased production costs if Tropicana had to raise prices, affecting its overall profit margins.
Step 2
Counterbalancing Factors
Answer
There are potential counterbalancing factors to consider. The changes in the exchange rate between January 2019 and April 2019 were relatively small. For instance, if the exchange rate fluctuated slightly (staying within a range of R4.0), the impact on total costs for Tropicana might not be as significant as initially expected. Additionally, if a considerable portion of Tropicana’s costs comes from domestic sources or other suppliers, the effect of the exchange rate movements on overall expenses might be limited.
Step 3
Proportion of Imports
Answer
Ultimately, the impact of the exchange rate on Tropicana's total costs will depend on the proportion of its costs associated with imported goods from Brazil. If a large portion of its production costs are tied to imported oranges, then fluctuations in exchange rates could yield a more substantial effect. Conversely, if the imports are a minor component of its overall costs, the influence would be relatively small.