10. [Disaggregating operating and exchange rate effects] Con- solidated income statements for the E&O Corporation follow (in Smilhons): Revenues 2000 200: 2002 $100.0 $110.0 $120.0 Operating expenses (70.0) (72.0) (74.0) Income taxes (9.0) (11.4) (13.8) Net income $ 21.0 $ 26.6 $ 32.2 These statements include the operations of E&O's foreign sub- sidiary, Erzi Limited, which operates in a country whose cur- rency is the LC Erzi has no inventory and no fixed assets. Excluding the effects of Erzi. E&O's income statement was con- stant in years 2000 to 2002 at. Revenues Operating expenses Income $ 50.0 million (45.0) (2.0) $ 3.0 million Net income 1996 1997 1998 1999 Exchange rate (average) 1.06 1.15 1.70 Exchange rate (closing) 1.03 1.10 1.19 1.95 Average and year-end exchange rates for years 2000 through 2002 follow

a. Compute the percent change in each of the following for fis- cal years 1997, 1998, and 1999 using the reported (SU.S.) data.

(b) Sales (i) Operating profit (li) Capital expenditures (iv) Segment assets

b. Using the exchange rate data, compute each of the four items in part a in BRL.

c. Compute the percent change in each of the four items in part a for fiscal years 1997, 1998, and 1999 using the BRL data from part

b. d. Compare the results of part c with those of part

a. e. Explain why the percent changes computed in part c provide more useful information ahout Rigesa's operations

f. Compute Rigesa's operating profit margin in both $U.S. and BRI. Explain why your answers do (or do not) differ. The BRL exchange rate at October 31. 2000 was 1.90BRL per $U.S. The average exchange rate for fiscal 2000 was 1.83BRL per SU.S. g. Compare the expected percent change during fiscal 2000 in SUS with the percent change in BRL (higher/lower/same) in each of the following: (i) Sales (ii) Operating profit (iii) Operating profit margin (iv) Segment assets 2000 2001 2002 Average Year-end LC1 = $1.00 LCT = $1.50 LC] = $1.50 LC1 = $2.00 LC1 = $0.75 LC1 = $0.50 As F&O's (unconsolidated) revenues and income were constant over the three-year period, all variations must result from the op- erations of Erzi.

a. Calculate how much of the observed growth in consolidated revenues and income over the 2000 to 2002 period resulted from Erzi's operations and how much was due to exchange rate changes

b. Discuss how the choice of functional currency affected the U.S. dollar income statement.