Suppose Your Company Is Holding Oil for Delivery in Three

question 117

Multiple Choice

Suppose your company is holding oil for delivery in three months and decides to hedge its position using futures. The purpose of this hedge is to offset a(n) _________ in the price of the oil by a(n) _________ in the value of the futures contract.

• A) increase; increase
• B) increase; decrease
• C) decrease; decrease
• D) decrease; increase
• E) Insufficient information.

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Definitions:

Activity Bases

Criteria or units of measure used to allocate costs in activity-based costing, reflecting the extent to which cost drivers are used or consumed.

Total Variable Cost

The sum of all costs that vary directly with the level of production or output.

Fixed Cost Per Unit

The total fixed costs of production divided by the number of units produced, decreasing as production volume increases.

Relevant Range

The level of activity within which the assumptions about fixed and variable costs in cost-volume-profit analysis remain valid.