Exchange Rates and Income Effects
Jelton, Inc., is a U.S. company that has some business operations in Canada. The Canadian operation exports most of its output to the U.S., but incurs most of its costs in Canadian dollars. The budgeted income statement for next year is shown below. Jelton wants to know the impact of three possible exchange rate scenarios for the Canadian dollar on its budgeted income statement (assume one Canadian dollar is equivalent to either $0.70, $0.80, or $0.90 in U.S. dollars).
JELTON, INC. BUDGETED INCOME STATEMENT FOR THE PERIOD ENDING DECEMBER 31, 2011 | ||
| U.S. | Candian |
Sales | $400.00 | C$ 5 |
Cost of good sold | 100.00 | 100 |
Gross profit | $300.00 | C$ (95) |
Operating expenses: |
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Fixed | 30.00 | –0– |
Variable | 40.00 | –0– |
Total | $ 70.00 | –0– |
Operating earnings | $230.00 | C$ (95) |
Interest expenses | 5.00 | 10 |
Earnings before tax | $225.00 | C$(105) |
Additional Information
Possible Exchange Rate | Projected U.S. Sales |
$0.70 | $395 |
.80 | 400 |
.90 | 405 |
Instructions
a. Complete the chart in the working papers related to Jelton’s budgeted income statement in U.S. dollars: .
| C$ = $0.70 | C$ = $0.80 | C$ = 0.90 |
Sales: |
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(1) U.S. |
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(2) Canadian |
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(3) Total |
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Cost of goods sold |
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(4) U.S. |
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(5) Canadian |
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(6) Total |
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(7) Gross profit |
| $224.00 |
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Operating expenses: |
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(8) U.S. fixed |
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(9) U.S. variable |
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10% of sales |
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(10) Total |
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(11) Operating earnings |
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| $148.55 |
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Interest expenses: |
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(12) U.S. |
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(13) Canadian |
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(14) Total |
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Earnings before tax | $146.65 |
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b. Explain the impact of a stronger Canadian dollar on earnings before tax.
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