Rolls-Royce Turbine Engines. Rolls-Royce is struggling with its pricing strategy with a number of its major customers in Continental Europe, particularly Airbus. Since Rolls-Royce is a British company with most manufacturing of the Airbus engines in the United Kingdom, costs are predominantly denominated in British pounds. But in the period shown in the popup window, 20072009, the pound steadily weakened against the euro. Rolls-Royce has traditionally denominated its sales contracts with Airbus in Airbus' home currency, the euro. After completing the table answer the following questions: a. Assuming each Rolls-Royce engine marketed to Airbus is initially priced at 22.50 million each, how has the price of that engine changed over the period shown when priced in euros at the current spot rate? b. Complete the table in the popup window, B What is the cumulative percentage change in the price of the engine in euros for the two-year period? c. 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's total sales revenue on sales to Airbus of this engine? d. Compare the prices and volumes for the first quarter of each of the three years shown in the table in part b above. Who has benefitted the most from the exchange rate changes? Date 1Q 2007 1Q 2008 1Q 2009 % Chg Price (in millions of pounds, ) f 22.50 22.50 22.50 % Spot rate (/) 1.4918 1.3198 1.1017 Price (in millions of euros, ) 33.57 29.70 24.79 % Sales volume (engines) 200 220 240 20.00 % Total cost to Airbus (millions of ) 6.714 6.534 5,950 % Total revenue to RR (millions of ) f 4.500 4.950 5,400 % What is the cumulative percentage change in the price of the engine in euros for the two-year period? (Select the best response.) O A. - 26.15% OB. 20.00% OC. 0.00% OD. - 11.38% c. 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's total sales revenue on sales to Airbus of this engine? "The appreciation of the euro reduces the cost of Airbus and thus increases the sales volume, which in turn increases the total sales revenue for Rolls-Royce in spite of the fact that the price of the engine in British pounds never changes. " The above statement is (Select from the drop-down menu.) d. Compare the prices and volumes for the first quarter of each of the three years shown in the table in part b above. Who has benefitted the most from the exchange rate changes? (Select the best response.) O A. Only Airbus. O B. Neither Rolls-Royce nor Airbus. O C. Only Rolls-Royce OD. Both Rolls-Royce and Airbus
