Wallerton, Inc., is a U.S. company that has business operations in Canada. Wallerton’s Canadian operation exports the majority of its output to customers in the U.S. and sells only a small portion of its output to Canadian customers. The following budgeted income statement for Wallerton separates the revenue and costs that are in Canadian dollars from those in U.S. dollars. Wallerton 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 $.75, $.80. or $.85 in U.S. dollars).
WALLERTON, INC. Budgeted Income Statement For the Period Ending December 31, 2007 | ||
| U.S. | Canadian |
Sales | $304.00 | C$ 4 |
Cost of goods sold | 50.00 | 200 |
Gross profit | $254.00 | C$(196) |
Operating expenses: |
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Fixed | 30.00 | −0− |
Variable | 30.72 | −0− |
Total | $ 60.72 | −0− |
Operating earnings | $193.28 | C$(196) |
Interest expenses | 3.00 | 10 |
Earnings before tax | $190.28 | C$(206) |
Additional information
Possible Exchange Rate | Projected U.S. Sales |
$.75 | $300 |
.80 | 304 |
.85 | 307 |
Instructions
a. Complete the chart in the working papers related to Wallerton’s budgeted income statement in U.S. dollars:
| C$ = $.75 | C$ = $.80 | C$ = $.85 |
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 |
| $97.20 |
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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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| $29.36 |
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 | $32.20 |
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b. Explain the impact of a stronger Canadian dollar on budgeted earnings before tax.
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