On October 1, 2021, Eagle Company Forecasts the Purchase of Inventory

question 43

Multiple Choice

On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of option expense for 2022 from these transactions?

• A)$1,000.
• B)$1,600.
• C)$2,500.
• D)$2,600.
• E)$0.

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Definitions:

Operating Income

Earnings from a company's core business operations, excluding expenses and revenues that are unrelated to the primary activities.

Unit Selling Price

The cost for one unit of a product when it is sold.

Unit Variable Costs

Costs that vary directly with the volume of production or sales, such as materials and labor, on a per-unit basis.

Contribution Margin Ratio

A financial metric that measures the portion of revenue remaining after variable production costs that can contribute to covering fixed costs and generating profit.