BEC MCQ – Impact of FX Rates on Foreign Purchases
A U.S. company is purchasing inventory components from a company in a foreign country. The price of the company’s routine inventory order is 100,000 foreign currency units (FCUs), and the exchange rate at the time of the last order was $1.45 per one FCU. The exchange rate changes to $1.60 per one FCU, and the U.S. company orders half of its normal quantity. What is the invoice difference from the last order?
A) A decrease of $65,000.
B) A decrease of $15,000.
C) An increase of $7,500.
D) An increase of $15,000.
A decrease of $65,000 is correct. There are three simple steps to calculating the correct answer for this question. The visual below outlines the transaction between the U.S. based company and the foreign company.
Step 1) The 1st invoice amount is calculated as 100,000 units x $1.45, which equals $145,000.
Step 2) The 2nd invoice amount is calculated as 50,000 units x $1.60, which equals $80,000. You have to realize that they only ordered half of the typical order since the exchange rate increased.
Step 3) The difference between the 2nd invoice and the 1st invoice would be calculated as $80,000 mins $145,000, which equals a decline of $65,000.
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