To encourage its foreign managers to incorporate expected exchange rate changes into their operating decisions, Vancouver Enterprises

Question:

To encourage its foreign managers to incorporate expected exchange rate changes into their operating decisions, Vancouver Enterprises requires that all foreign currency budgets be set in Canadian dollars using exchange rates projected for the end of the budget period. To further motivate its local managers to react to unexpected rate changes, operating results at period’s end are translated to dollars at the actual spot rate prevailing at that time. Deviations between actual and budgeted exchange rates are discarded in judging the manager’s performance. At the start of the 2010 fiscal year, budgeted results for a Mexican affiliate, the Cuernavaca Corporation, were as follows (amounts in thousands):

Actual results for the year in dollars were: sales, CAD2,160,000; expenses, CAD1,680,000; and net income, CAD 480,000. Relevant exchange rates for the peso during the year were as follows:

Jan. 1, 2010 spot rate: ………………………… CAD.00040

Global Enterprise’s one-year forecast ………… CAD.00032

Dec. 31, 2010 spot rate ………………………… CAD.00024

Required:

Based on the foregoing information, did the Mexican manager perform well? Support your answer using the variance analysis suggested in the chapter. (Refer to Exhibit 10-6.)

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...