Complexities of CVP Analysis in Multinational Companies Pinero Barrels, Inc. (PBI), manufactures oak barrels for the wine industry at its facility in the United States. One of the raw materials used for some of its barrels is French oak lumber. The company fabricates the oak lumber into the appropriate-sized staves and assembles these staves, along with other components, into barrels. In January 2009, the company signed a contract to buy oak lumber from a French supplier for the coming two years. The contract calls for PBI to pay the supplier in euros (‚¬), although all other costs that PBI incurs are paid for in dollars. A summary of the production cost for one barrel, based on the expected production level, follows:

The exchange rate between the dollar and the euro was $1.33 5 ‚¬1.00 in January 2009 when the contract was signed. By September 2009, the exchange rate had changed to $1.48 5 ‚¬1.00.
Required
a. CVP analysis is based on several assumptions. Explain which of these assumptions would be violated as a result of PBI 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 PBI€™s variable cost per unit for September versus January 2009?
c. What effect, if any, would the change in the exchange rate have on PBI€™s contribution margin per unit for September versus January 2009?
d. What effect, if any, would the change in the exchange rate have on PBI€™s fixed cost per unit for September versus January 2009?

Transcribed Image Text:

Variable costs: French oak $100* 150 50 All other variable costs Fixed costs: *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 January 2009.