MEMORANDUM TO: Analysts FROM: Nigel Montague

Managing Director, United Kingdom DATE: July6,2016

RE: Brexit

I think we have a problem created by the Brexit vote. The exchange rate is now 1.00 = 1.16! Please prepare a brief memo addressing the questions I have below.

1. What will happen to our profit, in both pounds and euros, if we do not change the price of products sold in the U.K.? (Calculate a new income statement using the new exchange rate. Assume that fixed costs remain fixed and variable costs vary proportionately with quantity sold.)

2. What will happen to our profit, in both pounds and euros, if we increase the price to 235 per unit here in the U.K.? Market research indicates that U.K. consumer behavior is somewhat elastic, so consider scenarios when the elasticity is 0.8 and when it is 1.1. (Calculate a new income statement using the new exchange rate. Assume that fixed costs remain fixed and variable costs vary proportionately with quantity sold.)

3. Do you think we should raise the price or not? Does the answer depend on whether we consider our subsidiarys perspective or that of the headquarters in Milan?