Perine Company has 2,000 pounds of raw materials in its December 31, 2013, ending inventory

BE9-4 Perine Company has 2,000 pounds of raw materials in its December 31, 2013, ending inventory. Required production for January and February of 2014 are 4,000 and 5,000 units, respectively. Two pounds of raw materials are needed for each unit, and the estimated cost per pound is $6. Management desires an ending inventory equal to 25% of next month’s materials requirements. Prepare the direct materials budget for January.

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The standard cost sheet calls for 80 pounds of zinc per batch of 70 faucets

P 12–11: Zinc Faucets

The standard cost sheet calls for 80 pounds of zinc per batch of 70 faucets. Zinc has a standard price of $5.10 per pound. One thousand pounds of zinc are purchased for $5,530. Ten batches of the faucets are produced, and 840 pounds of zinc are used. There was no beginning zinc inventory. All variances are calculated as soon as possible.

Required:
Prepare a table that decomposes the total purchase price of the zinc ($5,530) into its various components as calculated by the standard cost system.

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Jensen Company forecasts a need for 200,000 pounds of cotton in May

Jensen Company forecasts a need for 200,000 pounds of cotton in May. On April 11, the company acquires a call option to buy 200,000 pounds of cotton in May at a strike price of $0.3765 per pound for a premium of $814. Spot prices and options values at selected dates follow:

April 11 April 30 May 3
Spot price per pound $0.3718 $0.3801 $0.3842
Fair value of option 814 1,137 1,689

Jensen Company settled the option on May 3 and purchased 200,000 pounds of cotton on May 17 at a spot price of $0.3840 per pound. During the last half of May and the beginning of June the cotton was used to produce cloth. One third of the cloth was sold in June. The change in the option's time value is excluded from the assessment of hedge effectiveness.

Required:
a. Prepare all journal entries necessary through June to record the above transactions and events.
b. What would the effect on earnings have been if the forecasted purchase were not hedged?

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The futures price of British pounds is $2.00

The futures price of British pounds is $2.00. Futures contracts are for 10,000, so a contract is worth $20,000. The margin requirement is $2,000 a contract and the maintenance market requirement is $1,200. A speculator expects the price of the pound to fall and enters into a contract to sell pounds.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.13, what must the speculator do?
c. If the futures price continues to rise to $2.14, how much does the speculator have in the account?

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You expect to receive a payment of 1,000,000 in British pounds after six months the pound is currently worth $1.60 (i.e. 1 pound = $1.60), but the six-month futures price is $1.56 (i.e. 1 pound = $1.56)

You expect to receive a payment of 1,000,000 in British pounds after six months the pound is currently worth $1.60 (i.e. 1 pound = $1.60), but the six-month futures price is $1.56 (i.e. 1 pound = $1.56). You expect the price of the pound to decline (i.e. the value of the dollar to rise.) If this expectation is fulfilled, you will suffer a loss when the pounds are converted into dollars when you receive them six months in the future.
a. Given the current price, what is the expected payment in dollars?
b. Given the futures price, how much would you receive in dollars?
c. If, after six months the pound is worth $1.35, what is your loss from the decline in the value of the pound?
d. To avoid this potential loss, you decide to hedge and sell a contract for the future delivery of pounds at the going futures price of $1.56. What is the cost to you of this protection from the possible decline in the value of the pound?
e. If, after hedging, the price of the pound falls to $1.35, what is the maximum amount that you lose? Why is your answer different from (c)?
f. If, after hedging the price of the pound rises to $1.80, how much do you gain from your position?
g. How would your answer to part (f) be different if you had not hedged and the price of the pound had risen to $1.80?

Click here for the solution: You expect to receive a payment of 1,000,000 in British pounds after six months the pound is currently worth $1.60 (i.e. 1 pound = $1.60), but the six-month futures price is $1.56 (i.e. 1 pound = $1.56)