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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Custom Shutters. Inc., manufactures plantation shutters according to customer order. The company has a reputation for producing excellent quality shutters that fit virtually any size or shape of window. Sales are made in all 50 states. On July 1. Custom Shutters received orders from contractors in Switzerland and Japan. Lee Mills, president and co-owner of Custom Shutters, was delighted. The Swiss order is for shutters priced at $64,000. The order is due in Geneva on September 1, with payment due in full on October 1. The Japanese order is for shutters priced at $124,000. It is due in Tokyo on August 1, with payment due in full on October 1. Both orders are to be paid in the customer s currency. The Swiss customer has a reputation in the industry for late payment, and it could take as long as 6 months. Lee has never received payment in foreign currency before. He had his accountant prepare the following table of exchange rates.

Chapter 13, Problem 60P, Custom Shutters. Inc., manufactures plantation shutters according to customer order. The company has

Required:

  1. 1. If the price of the shutters is set using the spot rate as of July 1, how many francs does Lee expect to receive on October 1? How many yen does he expect on October 1?
  2. 2. Using the number of francs and yen calculated in Requirement 1, how many dollars does Lee expect to receive on October 1? Will he receive that much? What is the value of hedging in this situation?

1.

To determine

Compute the amount expected to be received in SF and Yen using spot exchange rates.

Explanation

Exchange Rate:

Exchange rate is a rate at which currencies of two countries can be traded. Exchange rates can be quoted directly or indirectly.

Computation of amount expected to be received:

ParticularsAmount
Transaction 1: 
Transaction price in $64,000
Spot exchange rate (SF per $)1.2360
Transaction price in SF ($64,000×1

2.

To determine

Compute the amount in dollars expected to be received on October 1.

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