Molto Delizioso: Pricing and Profits Following Brexit Devaluation

When the June 2016 referendum on the United Kingdom’s withdrawal from the European Union, or Brexit, resulted in a vote to leave, the managing director of the U.K. subsidiary of Italian coffee-machine maker Molto Delizioso, SRL, faced a scenario that affected many international firms and their subsidiaries. The U.K. subsidiary imported and paid for coffee machines in euros, but when it sold these items in the United Kingdom, the revenue earned was in pounds. The devaluation of the pound after the Brexit vote affected both the company’s revenues and costs and, therefore, its profits.

Molto Delizioso’s managing director had to decide what to do about pricing after the devaluation of the pound caused an increase in the cost of importing his gourmet coffee machines. If he kept prices the same, profits would go down significantly. Should he raise the prices he charged to the customer? And if so, by how much?