Kuoni, a leading Swiss tour operator, sells package tours to Sri Lanka for French, Belgian, and Swiss tourists. On January 1, 1996, Kuoni sent its printed catalog to French, Belgian, and Swiss travel agencies quoting prices of FFI2,OOO, BFI20,OOO, and SF3,OOO, respectively, valid throughout 1995 on their fortnight package tours to Sri Lanka.

The cost incurred by Kuoni, on a unit basis, is distributed as follows:

SFl,2oo for travel costs and SLR13,OOO (Sri Lankan rupees) for residential costs.

The exchange rate is SLRlO to SF1.

On March 30, an inflationary wage settlement results in an increase of 25 %

in the SLR cost of residential expenses that takes effect immediately. On August 15, the Swiss franc is revalued by 15% vis-a-vis the French and Belgian franc.

However, because of earlier booking, the SF revaluation cannot be passed through before January 1, 1995.

(a) Assuming that Kuoni sells 500 trips every 15 days, assess the impact of the Swiss franc revaluation upon the profitability of Kuoni in 1995.

(b) Assuming that Kuoni sells 50 % of the package tours to France and that the French demand for such services is characterized by a price elasticity of 1.5 and an income elasticity of 2, assess the impact of fully passing through the SF revaluation in a year in which the French real national income is expected to increase by 8%. Assume further that Belgian tourists are price-insensitive.

(c) Answer

(b) assuming that residential expenses for each tourist in excess of 500 are cut by 1.5% (economies of scale).