Question

Marietta Wood Products (MWP) manufactures disposable chopsticks for the 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 three years. The contract calls for MWP to pay the supplier in dollars, although all other costs MWP incurs are paid for in Chinese renminbi (¥). 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 exchange rate 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 exchange rate between the renminbi and the dollar was ¥6.83 5 $1.00in September 2009 when the contract was signed. By July 2012, the exchange rate had changed to ¥6.37 5 $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 MWP 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 exchange rate have on MWP’s variable cost per unit for September 2009 versus July 2012?
c. What effect, if any, would the change in the exchange rate have on MWP’s contribution margin per unit for September 2009 versus July 2012?
d. What effect, if any, would the change in the exchange rate have on MWP’s fixed cost per unit for September 2009 versus July 2012?



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  • CreatedFebruary 07, 2014
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