Devon Ltd manufactures plastic moulding machines. Annual company sales are £3 million in the UK and

£12 million in the rest of Europe (invoiced in euros, average exchange rate £0.60:€1). The cost of goods sold is

£11 million, half of which is incurred in the euro area again at £0.60:€1 (about half the product is actually made in Europe and half in the UK). Devon estimates that for every 1 per cent increase in the value of the euro its UK sales increase by 0.2 per cent and its euro sales decrease by 0.5 per cent. Profits are generally translated into British pounds at the end of the year.

a Calculate the percentage change in the gross profit based on a 10 per cent increase in the value of the euro.

Explain your result.

b Suggest how gross profits might be made less sensitive to the value of the euro.