The T-Shirt Factory Purchased 8 Futures Contracts on Cotton at a Quoted

question 29

Multiple Choice

The T-Shirt Factory purchased 8 futures contracts on cotton at a quoted price of 64.50 as a hedge against its inventory needs.At the time it actually needed the cotton,the spot price was 65.10.Cotton futures are based on 50,000 pounds and quoted in cents per pound.How much did the Shirt Factory save by hedging cotton?

• A) $90
• B) $560
• C) $1,280
• D) $2,400
• E) $3,000

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Definitions:

Variable Expenses

refer to costs that change in proportion to the level of production or sales volume.

Return On Investment

A measure of the profitability of an investment, calculated by dividing the net profit from the investment by its cost.

Operating Expenses

The costs associated with running the day-to-day operations of a business, excluding the cost of goods sold.

Average Operating Assets

Average operating assets are calculated by averaging the total value of a company's assets at the beginning and end of an accounting period, used in evaluating asset efficiency.