Riverside Cycles is a small retailer in England. The business has ordered replacement bicycle frames from a Danish company for resale to its customers. The ...
Question 1 Report
Riverside Cycles is a small retailer in England. The business has ordered replacement bicycle frames from a Danish company for resale to its customers. The supplier will not offer trade credit and has sent an invoice for 25 200 Danish krone (DKK). Riverside's bank gives the following exchange rate: £1 = DKK8.40. The manager is considering how changes in the exchange rate could affect the price of imported goods.
(a) Calculate the amount, in £, Riverside Cycles must pay for the frames. Show your working. [2]
(b) State two reasons why the retailer may use its bank to make this international payment. [2]
(c) Explain two possible effects on Riverside Cycles if the value of the pound falls against the DKK before payment is made. [4]
Answer Details
(a) The rate £1 = DKK8.40 means each pound buys DKK8.40. Convert DKK into pounds by dividing:
\[\text{DKK }25\,200\div8.40=\pounds3\,000\]
Riverside Cycles must pay £3 000 [2].
(b) Two valid reasons for using a bank are that it can transfer payment securely to the overseas supplier [1] and exchange pounds into DKK [1]. It may also provide proof of payment or advice on exchange rates and foreign trade.
(c) If the pound falls against the DKK, each pound buys fewer krone. Therefore Riverside needs more pounds to buy DKK25 200, so the frames cost more in pounds [1]. If its selling price stays unchanged, this higher cost reduces profit [1].
The retailer may instead raise the price charged to customers to cover the higher import cost [1]. However, higher prices may reduce demand or sales if customers choose cheaper alternatives [1]. These are two developed effects because each links the exchange-rate movement to a business consequence.
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