Helton Barrels, Inc. (HBI), manufactures oak barrels for the wine industry at its facility in the United
Question:
Variable costs:
French oak ............ $100*
All other variable costs ........ 150
Fixed costs ............. 50
*Based on the exchange rate at the time the contract with the French supplier was signed. The cost of lumber in euros was €77.50 as of July 2011.
The exchange rate between the dollar and the euro was $1.43 5 €1.00 in July 2011 when the contract was signed. By July 2012, the exchange rate had changed to $1.23 5 €1.00.
Required
a. CVP analysis is based on several assumptions. Explain which of these assumptions would be violated as a result of HBI having to pay for one of its raw materials in euros while its other costs and revenues are priced in dollars.
b. What effect, if any, would the change in the exchange rate have on HBI’s variable cost per unit for July 2011 versus July 2012?
c. What effect, if any, would the change in the exchange rate have on HBI’s contribution margin per unit for July 2011 versus July 2012?
d. What effect, if any, would the change in the exchange rate have on HBI’s fixed cost per unit for July 2011 versus July 2012?
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...
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Related Book For
Fundamental Managerial Accounting Concepts
ISBN: 978-0078025655
7th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Old
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