Exhibit 1 Pre Brexit Income Statement, Assuming 1 00 1 36 Per Unit Quantity (Units) Sales in the U K 200 40,000 8,000,000 U K Costs Contract Labor (variable cost 5 each) 5 40,000 200,000 Import of Coffee Machines (invoiced at 90 each) 90 40,000 3,600,000 2,647,059 Marketing and Distribution Costs (Fixed costs) 400,000 Other Fixed Costs Overheads, Interest, Depreciation, Rent, Salaries, etc 500,000 Profit (U K Subsidiary) 4,252,941 (5,784,000) Recalculate the income statement above using the post Brexit exchange rate of 1 00 1 16, assuming that there are no changes in prices charged by the company to U K buyers Calculate profits in both pounds and euros Fill out Exhibit 2 below with your answers Exhibit 2 Post Brexit Income Statement, Assuming 1 00 1 16, no change in prices Per Unit Quantity (Units) Sales in the U K 200 U K Costs Contract Labor (variable cost 5 each) 5 Import of Coffee Machines (invoiced at 90 each) 90 Marketing and Distribution Costs (Fixed costs) 400,000 Other Fixed Costs Overheads, Interest, Depreciation, Rent, Salaries, etc 500,000 Profit (U K Subsidiary) The VRA consultants argued that there were two potential price elasticities of demand ep 0 8 and ep 1 1 Why are there two different potential numbers Which seems the most realistic to you Explain If ep 8, should Molto Delizioso raise prices, lower prices, or keep them the same Explain If ep 1 1, and Molto Delizioso raises its prices to 235, will this increase or decrease revenue Explain Assume that marginal costs are constant and equal to variable costs What is the optimal markup over costs if ep 1 1 What is the optimal price if ep 1 1 Fill out Exhibit 3 below using the optimal price and compare profits to Exhibit 1 2 Estimate quantity demanded with Table 1 below Reflect on your results under this pricing strategy Is your result realistic What is the primary assumption it is relying on What do you think would happen if you set this specific price What things might undermine the assumptions that you are working under Ultimately, given the information from the case and your knowledge of the economics of pricing and exchange rates, what price would you set Explain Table 1 Estimated Demand Schedule Exhibit 3 Post Brexit Income Statement, Assuming 1 00 1 16, optimal price with ep 1 1 Per Unit Quantity (Units) Sales in the U K U K Costs Contract Labor (variable cost 5 each) 5 Import of Coffee Machines (invoiced at 90 each) 90 Marketing and Distribution Costs (Fixed costs) 400,000 Other Fixed Costs Overheads, Interest, Depreciation, Rent, Salaries, etc 500,000 Profit (U K Subsidiary) Demand for coffee machines with ep 1 1 1400 1200 1000 800 Price () 600 400 200 4 5 6 7 8 9 10 11 12 13 14 15 16 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 17 18 19 20 21 22 23 24 25 Quantity (thousands) Demand for coffee machines with ep 1 1 1400 1200 1000 800 Price () 600 400 200 4 5 6 7 8 9 10 11 12 13 14 15 16 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 17 18 19 20 21 22 23 24 25 Quantity (thousands)

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Exhibit 1: Pre-Brexit Income Statement, Assuming 1.00 = 1.36 Per Unit Quantity (Units) Sales in the U.K. 200 40,000 8,000,000 U.K. Costs Contract Labor (variable

Exhibit 1: Pre-Brexit Income Statement, Assuming 1.00 = 1.36

	Per Unit	Quantity (Units)
Sales in the U.K.	200	40,000		8,000,000
U.K. Costs
Contract Labor (variable cost 5 each)	5	40,000		200,000
Import of Coffee Machines (invoiced at 90 each)	90	40,000	3,600,000	2,647,059
Marketing and Distribution Costs (Fixed costs)				400,000
Other Fixed Costs: Overheads, Interest, Depreciation, Rent, Salaries, etc.				500,000
Profit (U.K. Subsidiary)				4,252,941 (5,784,000)

Recalculate the income statement above using the post Brexit exchange rate of 1.00 = 1.16, assuming that there are no changes in prices charged by the company to U.K. buyers. Calculate profits in both pounds and euros. Fill out Exhibit 2 below with your answers:

Exhibit 2: Post-Brexit Income Statement, Assuming 1.00 = 1.16, no change in prices

	Per Unit	Quantity (Units)
Sales in the U.K.	200
U.K. Costs
Contract Labor (variable cost 5 each)	5
Import of Coffee Machines (invoiced at 90 each)	90
Marketing and Distribution Costs (Fixed costs)			400,000
Other Fixed Costs: Overheads, Interest, Depreciation, Rent, Salaries, etc.			500,000
Profit (U.K. Subsidiary)

The VRA consultants argued that there were two potential price elasticities of demand: ep =- 0.8 and ep = -1.1
1. Why are there two different potential numbers? Which seems the most realistic to you? Explain.
2. If ep = -.8, should Molto Delizioso raise prices, lower prices, or keep them the same? Explain.
3. If ep = -1.1, and Molto Delizioso raises its prices to 235, will this increase or decrease revenue? Explain.

Assume that marginal costs are constant and equal to variable costs.
1. What is the optimal markup over costs if ep =- 1.1?
2. What is the optimal price if ep =- 1.1?
3. Fill out Exhibit 3 below using the optimal price and compare profits to Exhibit 1 & 2. Estimate quantity demanded with Table 1 below.
4. Reflect on your results under this pricing strategy.
  1. Is your result realistic?
  2. What is the primary assumption it is relying on?
  3. What do you think would happen if you set this specific price? What things might undermine the assumptions that you are working under?
  4. Ultimately, given the information from the case and your knowledge of the economics of pricing and exchange rates, what price would you set? Explain.

Table 1: Estimated Demand Schedule

Exhibit 3: Post-Brexit Income Statement, Assuming 1.00 = 1.16, optimal price with ep =- 1.1

	Per Unit	Quantity (Units)
Sales in the U.K.
U.K. Costs
Contract Labor (variable cost 5 each)	5
Import of Coffee Machines (invoiced at 90 each)	90
Marketing and Distribution Costs (Fixed costs)			400,000
Other Fixed Costs: Overheads, Interest, Depreciation, Rent, Salaries, etc.			500,000
Profit (U.K. Subsidiary)

Demand for coffee machines with ep = -1.1 1400 1200 1000 800 Price () 600 400 200 4 5 6 7 8 9 10 11 12 13 14 15 16 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 17 18 19 20 21 22 23 24 25 Quantity (thousands) Demand for coffee machines with ep = -1.1 1400 1200 1000 800 Price () 600 400 200 4 5 6 7 8 9 10 11 12 13 14 15 16 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 17 18 19 20 21 22 23 24 25 Quantity (thousands)