Dunn Barrels, Inc. (DBI) 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 July 2014, the company signed a contract to buy oak lumber from a French supplier for the coming two years. The contract calls for DBI to pay the supplier in euros (€), although all other costs that DBI incurs are paid for in dollars. A summary of the production cost for one barrel, based on the expected production level, follows:
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 2014.
The exchange rate between the dollar and the euro was $1.36 = €1.00 in July 2014 when the contract was signed. By July 2015, the exchange rate had changed to $1.10 = €1.00.
Required
a. CVP analysis is based on several assumptions. Explain which of these assumptions would be violated as a result of DBI 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 DBI's variable cost per unit for July 2014 versus July 2015?
c. What effect, if any, would the change in the exchange rate have on DBI's contribution margin per unit for July 2014 versus July 2015?
d. What effect, if any, would the change in the exchange rate have on DBI's fixed cost per unit for July 2014 versus July 2015?