Problem 12.8 Rolls- Royce Turbine Engines

Rolls Royce is struggling with its pricing strategy with a number of its major customers in Europe, particularly Airbus. Since Rolls-Royce is a British company with most manufacturing of the Airbus engines in the U.K. costs are denominated in British pounds. But in the period shown in table a) 2007-2009 , the pound steadily weakened agains teuro. Rolls-Royce has traditionally denominated its sales contracts with Airbus in Airbus home currency, the euro. After completing the table, answer the questions:

Assuming each Rolls Royce engine marketed to Airbus is initially priced at 22.5 million pounds each, how has the price of that engine changed over the period shown when priced in euros at the current spot rate?

What is the cummulative percentage change in the price of the engine in euros for the three year period?

If the price elasticity of demand for Rolls-Royce turbine sales to Airbus is relatively inelastic and the price of the engine in British pounds never changes over the period, what does this price change mean for Rolls-Royce total sales revenue on sales to Airbus of this engine?

Compare the prices and volumes for the first quarter of each of the three years shown in the table b) . Who has benefitted the most from the exchange rate changes?

Table A

Date	1Q 2007	2Q 2007	3Q 2007	4Q 2007	1Q 2008	2Q 2008
Price (million of pounds)	22.5 pounds	22.5 pounds	22.5 pounds	22.5 pounds	22.5 pounds	22.5 pounds
Spot rate (euro=1 pound)	1.4918	1.4733	1.4696	1.4107	1.3198	1.2617
Price (millions of euros)	33.57 euro
Date	3Q 2008	4Q 2008	1Q 2009	2Q 2009	3Q 2009	4Q 2009
Price (million of pounds)	22.5 pounds	22.5 pounds	22.5 pounds	22.5 pounds	22.5 pounds	22.5 pounds
Spot rate (euro=1 pound)	1.2590	1.1924	1.1017	1.1375	1.1467	1.1066
Price (millions of euros)

Table B

	1Q 2007	1Q 2008	1Q 2009	% change
Price in million pounds	22.5 pounds	22.5 pounds	22.5 pounds
Spot rate	1.4918	1.3198	1.1017
Price in millions of euro	33.57 euro	29.70 euro	24.79 euro
Sale volume	200	220	240	20%
Total cost to Airbus (millions of euro)	6,713,1 euro	6,533.01 euro	5,949.18 euro
Total Revenue to RR (millions of pounds)	4,500 pounds	4,950 pounds	5,400 pounds