Further quantitative data on Telford Engineering

• Telford Engineering exports 40% of its output to CETA.
• Telford Engineering imports 50% of its materials from CETA and import costs will be affected by the lower exchange rate post MEXIT.
• Pre-Exit Exchange rate: M$1.00 = C$1.40
• Post-Exit Exchange rate: M$1.00 = C$1.12
• Post-exit fall in export volume to CETA based countries = 30%
• Post exit general increase in departmental staff costs due to staff replacements (excluding Accounting Dept.) = 10%
• Increase in salaries of replacement staff in the accountancy department due to MEXIT announcement = 20%

Assumptions

1. Exit from CETA takes place in one year's time.
2. The exchange rate between Menai and CETA falls at the point at which MEXIT is announced but remains constant for the foreseeable future.
3. Exports are invoiced in the domestic country currency (Menai $) so there is no currency conversion effect on exports.
4. Fall in export volume is a one-off reduction due to MEXIT.
5. Imports from CETA are subject to the increased exchange rate conversion rate post exit.
6. Material volume will be affected proportionally by changes in sales volume, including exports.
7. Assume all other costs are fixed in respect of sales volume.
8. The general inflation rate is assumed to be zero each year for all revenue and costs (including wage inflation for all staff remaining in post, except when being replaced).
9. Assume all amortization costs and overheads remain constant for the next year and for the foreseeable future.
10. Ignore time value of money and taxation.

Non-core functions in the General Administration department can be outsourced, saving 20% of the staff costs and other costs, included immediately below under the general admin heading, as stated in the current P/L account.

Calculate the effect on net profit (to the nearest $M'000). For your answer only provide the first three numbers and do not include any symbols, for example, "543".

Answer rating: 100% (QA)

To calculate the effect on net profit we need to consider the changes in revenue and costs due to ME... View the full answer