Problem

Wallerton, Inc., is a U.S. company that has business operations in Canada. Wallerton’s Can...

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:

 

 

    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:

 

 

 

   (1) U.S.

 

 

 

   (2) Canadian

 

 

 

   (3) Total

 

 

 

 

 

 

 

Cost of goods sold:

 

 

 

   (4) U.S.

 

 

 

   (5) Canadian

 

 

 

   (6) Total

 

 

 

 

 

 

 

  (7) Gross profit

 

$97.20

 

 

 

 

 

Operating expenses:

 

 

 

  (8) U.S. fixed

 

 

 

  (9) U.S. variable

 

 

 

  10% of sales

 

 

 

  (10) Total

 

 

 

  (11) Operating earnings

 

 

$29.36

Interest expenses:

 

 

 

   (12) U.S.

 

 

 

  (13) Canadian

 

 

 

  (14) Total

 

 

 

Earnings before tax

$32.20

 

 


b. Explain the impact of a stronger Canadian dollar on budgeted earnings before tax.

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