Question

International Marketing Incident A: Argentina Currency Devaluation A long simmering conflict between Argentina and the United Kingdom over sovereignty of the Falkland Islands has begun to escalate. The UK has announced its intention to begin oil exploration on the island. The Argentine government has protested the UK's right to do so. The conflict has reignited tensions going back to the 1982 war between the two countries over the Falkland Islands. Because of the escalating tension, many investors are moving their money out of Argentine Pesos and into more stable currencies. This capital flight has caused the Argentine Peso to drop on foreign exchange markets. Your group is currently operating in Argentina. AllStar management is concerned to what extent the Argentine Peso will be devalued. They want to examine two scenarios where the currency drops 15% and 25%. Currently the exchange rate is 4.2974 Pesos to Dollars (see Exhibit 1). How would the devaluation of the Argentine Peso affect your contribution in the home currency ($)? How much more sales revenue would be needed in Argentina to maintain your current contribution? Contribution after Marketing in Argentina for the period was 21% of sales (see Exhibit 2). Your goal is to maintain this percentage. Exhibit 1: Exchange Rates Home Dollar ($) Arg. Peso (ARS) Bra. Real (BRL) Chi. Peso (CLP) Mex. Peso (MXN) Peru Sol (PEN) Ven. Bolivar (VEB) 4.2974 1.9376 0.4509 Home Argentina Brazil Chile Mexico Peru Venezuela 518.13 120.57 267.41 0.2327 0.5161 0.0019 12.2699 2.8552 6.3325 0.0237 2.9386 0.6838 1.5166 0.0057 2.2179 0.0083 0.3502 1.4624 5.6786 1.3214 2.9307 0.011 0.4628 1.9324 0.0815 0.0037 0.1579 0.6594 0.2395 42.23 176.32 0.3403 4.1755 2.1607 0.1761 0.7568 0.3412 91.24 0.5175 Exhibit 2: Argentina Contribution after Marketing ARS 46 Unit Sales Manufacturer Sales Costs Gross Margin 325.9 183.3 100% 40% 44% 142.6 Total Marketing 73.3 23% Contribution after Mkting 69.3 21%

What is the additional sales revenue needed to maintain contribution? *Please include formula used!*

Answer 1

ARS 49.5 sales revenue would be needed in Argentina to maintain current contribution of USD 16.12603

Working Notes :

Contribution after Marketing in ARS (a)	69.3
Exchange rate per USD to ARS (b)	4.2974
Contribution after Marketing in USD (c=a/b )	16.12603
Exchange rate per USD to ARS (d)	4.2974
15% devaluation in ARS (e)	0.64461
Revised Exchange rate per USD to ARS (f=d+e)	4.94201
Contribution after Marketing in USD with devalued ARS (g=a/f))	14.02263
Reduction in contribution in USD (h=c-g)	2.103395
Contribution required to compensate devaluatio (i=h*f)	10.395
Revenue required to generate additional contribution (i/21%)	49.5