M/s Omega Electronics Ltd. exports air conditioners to Germany by importing all the components from Singapore. The company is exporting 2,400 units…

(A) Profit at current exchange rates 2400 [€ 500 × ₹ 51.50 – (S$ 800 × ₹ 27.25 +1,000 +1,500)] 2400 [ 25,750 -24,300] = 34,80,000 Profit after change in exchange rates 2400[€500×₹ 52 – (S$ 800 × ₹ 27.75 +1000 +1500)] 2400[ 26,000 -24,700] = 31,20,000 Loss due to Transaction Exposure 34,80,000 - 31,20,000 = 3,60,000 (B) Profit based on new spot exchange rates 2400[ 25,000 - (800 × ₹ 27.15 +1,000 +1,500)] 2400[ 25,000 -24,220] = 18,72,000 Profit after change in exchange rates at the end of six months 2400 [ 25,000 - (800 × ₹ 27.75 +1,000 +1,500)] 2400 [ 25,000 -24,700] = 7,20,000 Decline in profit due to Transaction Exposure 18,72,000 -7,20,000 = 11,52,000 Current price of each unit in € = 25,000 / 51.50 = € 485.44 Price after change in Exch. Rate = 25,000 / 51.75 = € 483.09 Change in Price due to change in Exch. Rate € 485.44 - € 483.09 = € 2.35 or (-) 0.48% Price elasticity of demand = 1.5 Increase in demand due to fall in price 0.48 × 1.5 = 0.72% Size of increased order = 2400 × 1.0072 = 2417 units Profit = 2417 [₹ 25,000 – (800 × ₹ 27.75 +1,000 +1,500)] = 2417 [ 25,000 -24,700] = 7,25,100 Therefore, decrease in profit due to Operating Exposure 18,72,000 - 7,25,100 = 11,46,900 Alternatively, if it is assumed that Fixed Cost shall not be changed with change in units then answer will be as follows: Fixed Cost = 2400[₹ 1,000] = 24,00,000 Profit = 2417 [ 25,000 – (800 × ₹ 27.75 +1,500)] - 24,00,000 = 2417 ( 1,300) - 24,00,000 = 7,42,100 Therefore, decrease in profit due to operating exposure 18,72,000 - 7,42,100 = 11,29,900