Pete has a South African restaurant in the centre of Stafford. To ensure that his meals are as authentic as possible he imports some of the ingredients from Cape Town. The exchange rate between the pound (£) and the Dollar($) is very important to Pete. He buys 500 kg of Biltong from Cape Town every month. The Biltong costs $10 per kg.
Since his last shipment in February, the exchange rate has changed to £1.00 = $1.50 from £1 = $1.40
What would be one effect on Pete’s business of this change, assuming he imports the same amount of Biltong each month?
Select ONE answer:
- Lower profit
- Cash flow deteriorates
- Able to charge lower prices
- Higher variable costs
Show the workings to arrive at your answer, and explain and justify your reasons:
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This multiple choice question is suitable for Business Studies KS4 & KS3 classes
The answer is 3:
- Lower profit – is not correct because variable costs in £s would decrease therefore profit increases.
- Cash flow deteriorates – is not correct because variable costs in £s would decrease therefore cash flow would improve.
- Able to charge lower prices – is correct because variable costs in £s are lower allowing lower prices to be charged.
- Higher variable costs – is not correct because variable costs would be lower.
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