Fuzhou Wood Products (FWP) manufactures disposable chopsticks for the Chinese restaurant industry at its highly automated production

Question:

Fuzhou Wood Products (FWP) manufactures disposable chopsticks for the Chinese restaurant industry at its highly automated production facility in China. The main raw material used to produce the chopsticks is wood that is purchased in bulk from suppliers in the United States. In September 2009, the company signed a contract to buy wood from a U.S. supplier for the coming eight years. The contract calls for FWP to pay the supplier in dollars, although all other costs FWP incurs are paid for in Chinese currency renminbi, the unit of which is yuan (¥). A summary of the production costs for a box of 1,000 sets of chopsticks, based on the expected production level, follows:
Variable costs
Wood ........................................... ¥6,000*
All other variable costs ..................... 600
Fixed costs .................................... 5,400
*Based on the at the time the contract
with the U.S. supplier was signed. The cost of wood
in dollars was $50 as of January 2009.
The between the renminbi and the dollar was ¥6.83 = $1.00 in September 2009 when the contract was signed. By May 2015, the had changed to ¥6.08 = $1.00. (Exchange rates are rounded to the nearest cent.)
Required
a. CVP analysis is based on several assumptions. Explain which of these assumptions would be violated
as a result of FWP having to pay for one of its raw materials in dollars while its other costs and revenues are priced in renminbi.
b. What effect, if any, would the change in the have on FWP's variable cost per unit for September 2009 versus May 2015?
c. What effect, if any, would the change in the have on FWP's per unit for September 2009 versus May 2015?
d. What effect, if any, would the change in the have on FWP's fixed cost per unit for September 2009 versus May 2015?
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...