Woodlands Company (a U.S.-based company) has a subsidiary in Mexico that exports all of its production to customers in Asian markets and sources all of its inputs locally. Budgets in Mexican pesos (MXN) and U.S. dollars (USD) using the beginning of period exchange rate of USD 0.08 per MXN 1.00 are as follows: 

During the budget period, the MXN decreased in value by 25 percent against world currencies, such that the end-of-period exchange rate was USD 0.06 per MXN 1.00. Assuming that Woodlands uses the end-of-period exchange rate to track actual performance, actual results in MXN and USD are as follows: 

As a result, there is an unfavorable total budget variance of MXN 500,000 and an unfavorable total budget variance of USD 230,000. 

Required: 

a. Determine the amount of the USD 230,000 unfavorable total budget variance caused by a change in the USD/MXN exchange rate. 

b. Taking economic exposure to foreign exchange risk into consideration, estimate what profit would have been (in both MXN and USD) if the Mexican subsidiary’s manager had taken full advantage of the decrease in value of the MXN.

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MXN USD Sales. 40,000,000 3,200,000 Costs. 30,000,000 2,400,000 Profit 10,000,000 800,000