To evaluate the potential profitability of the sales in Malaysia under the three scenarios presented, let's break down each scenario step-by-step, considering both the exchange rates and related costs.
Scenario 1: Using the Spot Rate on April 1st
Revenue Calculation
- Total Sales Revenue: 1,250,000 MYR
- Spot Rate on April 1: 3.52 MYR/USD
- Revenue in USD = Total Sales Revenue / Spot Rate = \( \frac{1,250,000 \text{ MYR}}{3.52 \text{ MYR/USD}} \approx 355,682 \text{ USD} \)
Cost Calculation
- Units Sold: 4,000 units
- Break-even Point per Unit: $90
- Total Cost = 4,000 units × $90/unit = $360,000
Profit Calculation
- Profit = Revenue - Total Cost = \( 355,682 \text{ USD} - 360,000 \text{ USD} = -4,318 \text{ USD} \) (Loss)
Scenario 2: Using the Forward Rate on January 1st
Revenue Calculation
- Forward Rate on January 1: 0.317 USD/MYR
- Revenue in USD = Total Sales Revenue × Forward Rate = \( 1,250,000 \text{ MYR} \times 0.317 \text{ USD/MYR} \approx 396,250 \text{ USD} \)
Cost Calculation (same as Scenario 1)
- Total Cost: $360,000
Profit Calculation
- Profit = Revenue - Total Cost = \( 396,250 \text{ USD} - 360,000 \text{ USD} = 36,250 \text{ USD} \) (Profit)
Scenario 3: Spending the Foreign Currency
In this scenario, the company converts the sales revenue directly to raw materials or other necessary expenses without exchanging it to USD.
Revenue Calculation
- Total Sales Revenue: 1,250,000 MYR
- The company can spend this 1,250,000 MYR directly on raw materials or other expenses. Assuming the company buys raw materials costing equivalent MYR and avoids costs of conversion, the effective revenue in the company's local operations stays the same in MYR.
Cost Calculation
Assuming the company can reinvest that MYR directly rather than converting it:
- Break-even remains: $360,000 total in costs, but now it's in MYR.
However, without converting, we cannot calculate profitability in USD, but it can assume everything cost-wise could be calculated back to MYR to evaluate if the MYR matches the costs directly as they are incurred.
Summary of the Scenarios
- Scenario 1: Using the spot rate results in a loss of approximately $4,318.
- Scenario 2: Locking in the forward rate yields a profit of approximately $36,250.
- Scenario 3: Spending the MYR directly avoids currency exchange losses, maintaining the MYR revenue potential, but profitability in USD can't be directly determined without further details on costs in MYR.
Conclusion
Each option has its pros and cons, but based on these figures:
- Scenario 2 presents the most favorable outcome with a significant profit due to the advantageous forward rate locked in on January 1.
- Scenario 1 leads to a slight loss due to unfavorable exchange rate fluctuations.
- Scenario 3 may provide operational benefit if the MYR can be effectively utilized for necessary purchases without needing USD conversion, but profitability needs careful monitoring against local costs.