Devon Ltd manufactures plastic moulding machines. Annual company sales are £3 million in the UK and £12 million in the rest of Europe (invoiced in euros, average exchange rate £0.60:1 euro). The cost of goods sold are £11 million, half of which is incurred in the euro area again at £0.60:1 euro (about half the product is actually made in Europe and half in the UK). Devon estimates that for every 1% increase in the value of the euro its UK sales increase by 0.2% and its euro sales decrease by 0.5%. Profits are generally translated into British pounds at the end of the year.
a. Calculate the percentage change in the gross profit based on a 10% increase in the value of the euro. Explain your result.
b. Suggest how gross profits might be made less sensitive to the value of the euro.