Business – 6.1 External influences – International | e-Consult
6.1 External influences – International (1 questions)
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Model Answer:
- Profit Comparison: The export‑oriented operation generates £600 k profit, £100 k more than the domestic‑only model (£500 k). The additional export sales contribute £200 k profit, offsetting a £100 k reduction in domestic profit, indicating a net gain from diversification.
- Effect of a 10 % Currency Depreciation:
- Assume export revenue is earned in a foreign currency and converted to pounds. A 10 % depreciation of the pound means each foreign unit now converts to 10 % more pounds.
- Export profit of £200 k would increase by approximately 10 %, adding £20 k, raising total profit to £620 k.
- Thus, currency depreciation improves the profitability of the export segment, making international trading links even more attractive.
- Strategic Implication: The higher profit margin and favourable exchange‑rate effect suggest the firm should consider expanding its export activities, possibly investing in market research and foreign distribution channels.