Custom Shutters, Inc., manufactures plantation shutters according to customer order. The company has a reputation for producing excellent quality shutters that fit virtu- ally 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, presi- dent 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 six months. Lee has never received payment in foreign currency before. He had his accountant prepare the following table of exchange rates: Exchange Rate for $1 Swiss Franc Yen Spot rate 1.2360 117.70 30-Day forward rate 1.2450 117.68 90-Day forward rate 1.2590 117.70 180-Day forward rate 1.2708 117.66 Required 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. 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?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Custom Shutters, Inc., manufactures plantation shutters according to customer order. The company has a reputation for producing excellent quality shutters that fit virtu- ally 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, presi- dent 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 six months. Lee has never received payment in foreign currency before. He had his accountant prepare the following table of exchange rates:
Exchange Rate for $1
Swiss Franc Yen
| Spot rate | 1.2360 | 117.70 |
| 30-Day forward rate | 1.2450 | 117.68 |
| 90-Day forward rate | 1.2590 | 117.70 |
| 180-Day forward rate | 1.2708 | 117.66 |
Required
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. 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?
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