1. Assuming that 1983 data (the latest provided in the case) are representative, the company's sales prior to a dollar devaluation were $214 million. Given that 20 percent of the company's production occurred in Ireland, the Irish operation's production accounted for $42.8 million in sales. Direct cost of sales at the company's Irish operation approximated 48 percent of sales, or $20.5 million, while operating and other expenses approximated 37 percent of sales, or $15.8 million. Approximately 30 percent, or $6.2 million. of the direct cost of sales at the company's Irish operation is locally sourced, while all of the operating and other expenses at the company's Irish operation are incurred in Irish currency. Thus, total cost incurred in Irish currency by the company's Irish operation approximates $22 million prior to any dollar devaluation.
A dollar devaluation will cause the relative expense of the company's Irish operation to increase proportionately to the degree of the devaluation and the level of expenses tied to the Irish currency. Thus, the effect of a 20 percent dollar devaluation based on the data provided above would approximate an increase in the relative expense of the production of the company's Irish operation of $4.4 million.
2. Bourquin should respond to the request of the Irish controller by permitting the controller to but forward to protect the 1985 budgeted profit of the company's Irish operation. With the dollar/punt exchange rate in the middle of the 20 year average, and an unsettled international economic environment, it would be prudent to permit the Irish controller to act to protect the 1985 budgeted profit. This permission to buy forward, however, should be limited to the protection of the 1985 budget profit. As conditions in the international economic environment often change rapidly, the situation should be reviewed in a year's time, before a decision is made in the desired procedure for ...