Exchange Rates and Currency Exchange

A Mexican manufacturer imports its parts from Canada and assembles its product in Mexico, then exports some of the finished product back to Canada to sell at retail. Suppose the total cost of the imported parts, purchased and paid for in Canadian funds, is $C$5.50$ per unit, assembly costs are $MXN$24.54$ per unit, and expenses are $MXN$4.38$ per unit. If the product is exported back to Canada at a selling price of $C$9.95$ (for which its Canadian customers pay in Canadian funds), what is the total profit in Mexican pesos on 10,000 units? The manufacturer's financial institution charges a sell rate 2% higher than the mid-rate and has a buy rate that is 3% lower than the mid-rate. Use the mid-rates from the cross-rate table.

Solution

Calculate the total profit $( P )$ in $MXN$$ for the Mexican manufacturer. However, since money is being expressed in different currencies, you must first convert all amounts into Mexican pesos.

What You Already Know

Step 1:

You know the costs, expenses, price, and mid-rate:

$C_{parts}=10,000×C$5.50=C$55,000$

$C_{assembly}=10,000×MXN$24.54=MXN$245,400$

$E=10,000×MXN$4.38=MXN$43,800$

$S=10,000×C$9.95=C$99,500$

Mid-Rate = $12.1445$ per $C$$

Sell Rate = 2% higher

Buy Rate = 3% lower

Note the mid-rate used is "per $C$$" since the manufacturer needs to purchase Canadian funds to pay its suppliers and also needs to sell its Canadian revenues to the bank.

How You Will Get There

Step 2:

Calculate the buy and sell rates.

Step 3 (Parts):

Convert the purchase of the parts in $C$$ into $MXN$$ using the sell rate. Apply and adapt Formula 7.4.

Step 3 (Sale):

Convert the sale of the product in $C$$ into $MXN$$ using the buy rate. Apply and adapt Formula 7.4.

Step 4:

All amounts are in $MXN$$ Apply Formula 6.5: $S=C_{parts}+C_{assembly}+E+P$

Perform

Step 2:

Sell Rate = 2% higher than mid-rate = $12.1445 (1 + 0.02) = 12.3874$

Buy Rate = 3% lower than mid-rate = $12.1445 (1 − 0.03) = 11.7802$

Step 3 (Parts):

$C_{parts}\ in\ MXN$=12.3874×$55,000=$681,307$

Step 3 (Sale):

$S\ in\ MXN$=11.7802×$99,500=$1,172,129.90$

$\begin{aligned} \$ 1,172,129.90 &=\$ 681,307+\$ 245,400+\$ 43,800+P \\ \$ 1,172,129.90 &=\$ 970,507+P \\ \$ 201,622.90 &=P \end{aligned}$

After converting all Canadian currency into Mexican pesos and factoring in the financial institution's buy and sell rates, the manufacturer realizes a profit of $$201,622.90$ in Mexican pesos.