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7115 · 6.3

Business and the international economy — practice questions

Practice and worked examples for 7115 Business and the international economy. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Premium cosmetics firm considers entering India. Options: online export only, franchise with local retailer, or 50/50 joint venture with Indian beauty group. Recommend an approach.

Show solution outline

Export only: Low risk but no local shop experience for premium brand; import duties raise price.

Franchise: Faster rollout, local retail expertise; quality control risk if franchisee deviates.

Joint venture: Shared market knowledge, navigate regulations; profit split, conflict possible (7.1.4 trust).

Adaptation: Shades and formulations for Indian skin tones; modest promotion vs Western imagery — glocalisation.

Recommendation: JV or master franchise for physical presence; adapt product line; keep global brand identity.

Worked example 2

BritBikes, a UK-based bicycle manufacturer, plans to sell 500 high-end bikes in Germany next year at a price of €1,200 each. It is considering two entry strategies:

  1. Exporting: Produce bikes in the UK at a cost of £600 each and export them. Shipping costs £50 per bike, and Germany imposes a 10% import tariff on the UK production cost. German marketing costs are €100 per bike.
  2. FDI: Set up an assembly plant in Germany. Components from the UK cost £450 per bike with £20 shipping. German assembly labour is €150 per bike, and annual factory overheads are €80,000. Local marketing costs would be €80 per bike.

Given an exchange rate of £1 = €1.15, calculate the expected annual profit for each option and recommend a strategy.

Show solution outline

1. Calculate Total Revenue Total Revenue = Sales Volume × Selling Price Total Revenue = 500 bikes × €1,200/bike = €600,000

2. Calculate Profit for Option 1: Exporting

  • Step 2a: Calculate cost per bike in Euros
    • UK Production Cost: £600 × 1.15 = €690
    • Shipping Cost: £50 × 1.15 = €57.50
    • Import Tariff (10% of production cost): 0.10 × €690 = €69
    • German Marketing Cost: €100
    • Total Cost per Bike: €690 + €57.50 + €69 + €100 = €916.50
  • Step 2b: Calculate total annual profit
    • Total Annual Cost: 500 bikes × €916.50 = €458,250
    • Annual Profit (Exporting): €600,000 - €458,250 = €141,750

3. Calculate Profit for Option 2: FDI

  • Step 3a: Calculate variable cost per bike in Euros
    • UK Component Cost: £450 × 1.15 = €517.50
    • Component Shipping Cost: £20 × 1.15 = €23
    • German Assembly Labour: €150
    • German Marketing Cost: €80
    • Total Variable Cost per Bike: €517.50 + €23 + €150 + €80 = €770.50
  • Step 3b: Calculate total annual profit
    • Total Annual Variable Cost: 500 bikes × €770.50 = €385,250
    • Total Annual Cost = Total Variable Cost + Fixed Costs = €385,250 + €80,000 = €465,250
    • Annual Profit (FDI): €600,000 - €465,250 = €134,750

4. Recommendation Based purely on the first year's profit forecast, Exporting is the more profitable option (€141,750 vs €134,750). It is also lower risk as it does not require a large initial capital investment for a factory.

However, the business should also consider long-term factors. The FDI strategy offers greater control over quality and marketing, avoids tariff risks (which could increase), and establishes a stronger local presence for future growth. If BritBikes is confident in the long-term potential of the German market, the FDI option may be strategically superior despite lower initial profits.

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