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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

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,

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,

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

22.56

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,

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. 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?

Question content area bottom

Part 1

a. Compute the sales prices per unit of engine in euros for the three-year period in the following table:(Round to two decimal places.)

Date

1Q 2007

2Q 2007

3Q 2007

4Q 2007

1Q 2008

2Q 2008

Price (millions of pounds, )

22.56

22.56

22.56

22.56

22.56

22.56

Spot rate (euro = 1.00 pound)

1.4913

1.4744

1.4656

1.4121

1.3189

1.2608

Price (millions of euros, )

33.64

33.26

33.06

31.86

29.75

28.44

Date

3Q 2008

4Q 2008

1Q 2009

2Q 2009

3Q 2009

4Q 2009

Price (millions of pounds, )

22.56

22.56

22.56

22.56

22.56

22.56

Spot rate (euro = 1.00 pound)

1.2579

1.1938

1.1022

1.1365

1.1488

1.1097

Price (millions of euros, )

28.38

26.93

24.87

25.64

25.92

25.03

Part 2

Assuming each Rolls-Royce engine marketed to Airbus is initially priced at

22.56

million each, how has the price of that engine changed over the period shown when priced in euros at the current spot rate?(Select the best response.)

A.

The price of the engine in euros has decreased over the three-year period due to the appreciation of the euro over the period.

Your answer is correct.

B.

The price of the engine in euros has decreased over the three-year period due to the depreciation of the euro over the period.

C.

The price of the engine in euros has increased over the three-year period due to the appreciation of the euro over the period.

D.

The price of the engine in euros has increased over the three-year period due to the depreciation of the euro over the period.

Part 3

b. Complete the table below:(Round to two decimal places.)

Date

1Q 2007

1Q 2008

1Q 2009

% Chg

Price (in millions of pounds, )

22.56

22.56

22.56

%

Spot rate (/)

1.4913

1.3189

1.1022

Price (in millions of euros, )

33.64

29.75

24.87

%

Sales volume (engines)

500

550

600

20.00

%

Total cost to Airbus (millions of )

16,820

16,363

14,922

%

Total revenue to RR (millions of )

11,280

12,408

13,536

%

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