To trace an exchange rate change, work in order: find the direction, convert the amounts, find the change, then link it to profit and decisions. The skill appears in case questions about firms that import materials or sell abroad.
It sits inside external business conditions, and it uses the same cost and profit thinking as costs, revenue and break-even.
What does the exchange rate actually tell you?
An exchange rate is a price: how many ringgit you pay for one unit of another currency. If EUR 1 = RM4.80, a machine priced at EUR 2,000 costs 2,000 × 4.80 = RM9,600.
When the number of ringgit per euro rises, the euro has become more expensive. That means the ringgit has become weaker against the euro. Imports priced in euros then cost more ringgit.
How do you trace the effect, step by step?
- Direction. Is the foreign currency now dearer or cheaper in ringgit? Say “ringgit weaker” or “ringgit stronger” clearly.
- Convert before and after. Multiply the foreign price by each rate.
- Find the change in ringgit, and as a percentage if the question gives a base.
- Link to profit. Compare the new cost with the selling price, per unit and per month.
- Say what the firm could do, and what it would need to know first.
Worked example
Mesin Kopi Pulau Sdn Bhd in George Town imports espresso machines from Italy at EUR 2,000 each. It sells each machine for RM12,500 and sells 10 a month. All figures are invented.
The rate moves from EUR 1 = RM4.80 to EUR 1 = RM5.20.
Step 1, direction: the euro now costs more ringgit, so the ringgit is weaker.
Step 2, convert: before, 2,000 × 4.80 = RM9,600. After, 2,000 × 5.20 = RM10,400.
Step 3, change: 10,400 − 9,600 = RM800 more per machine. As a percentage, 800 ÷ 9,600 = 8.33%.
Step 4, profit: profit per machine falls from 12,500 − 9,600 = RM2,900 to 12,500 − 10,400 = RM2,100. The margin falls from 2,900 ÷ 12,500 = 23.2% to 2,100 ÷ 12,500 = 16.8%. Over 10 machines, monthly profit falls from RM29,000 to RM21,000, a drop of RM8,000.
Step 5, options: to keep RM2,900 profit per machine, the price would have to rise by RM800 to RM13,300, which is 6.4% more. Whether customers would still buy at RM13,300 is not in the case, so a good answer says the firm needs that evidence. It could also ask the supplier about a fixed price in ringgit, or look for another supplier.
If the firm pays 60 days after delivery, the rate on the payment date is the one that counts. The cash versus profit bridge shows how timing separates cash from profit, and the ratios tool helps with the margin calculation.
The mistake to watch for
Mistaken answer: “The rate went from 4.80 to 5.20, so the ringgit is stronger and the importer pays less.”
The student read a bigger number as a stronger ringgit. The rate states the price of the euro, not the value of the ringgit.
Correction: the euro became dearer, so the ringgit is weaker and the importer pays more. Always ask “which currency got more expensive?” before writing a direction.
Check yourself
1. Using the same firm, the rate falls to EUR 1 = RM4.50. Find the new cost per machine and the saving.
Show answer
New cost: 2,000 × 4.50 = RM9,000. Before: RM9,600. Saving: RM600 per machine, which is 600 ÷ 9,600 = 6.25%. The ringgit is stronger against the euro.
2. Kain Batik Sdn Bhd sells a shipment for USD 50 per piece. The rate moves from USD 1 = RM4.40 to USD 1 = RM4.20. What happens to the ringgit it receives per piece, and is the ringgit weaker or stronger?
Show answer
Before: 50 × 4.40 = RM220. After: 50 × 4.20 = RM210. The firm receives RM10 less per piece. The dollar buys fewer ringgit, so the ringgit is stronger.
3. The rate moves from EUR 1 = RM4.80 to EUR 1 = RM5.20. Which firm is helped: an importer of Italian tiles, or an exporter paid in euros? Give one reason.
Show answer
The exporter paid in euros is helped. Each euro it earns converts into more ringgit. The tile importer pays more ringgit for the same tiles.
Where this leads next
Next, see how general price rises affect stated costs in explain an inflation effect on stated costs. To compare firms with different exposure, use compare trade exposure for two firms, and test the whole topic in the external business conditions practice set.
Case questions reward students who follow a change through to the firm’s own figures, which is the habit our teachers build in online one-to-one Business tuition.