Exhibit 14-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\quad$

question 41

Multiple Choice

Exhibit 14-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of 500,000 barrels per month. Due to the cost structure of the business, BGI needs to receive $56.50 per barrel in order to remain solvent. On the other side of this situation is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West Texas crude oil in its normal production operations. The nature of PU's business is such that they will financially suffer if they have to pay more than an average of $57.80 per barrel for oil over the next six years. To hedge against their exposure to volatile oil prices, BI and PU contact a swap dealer to arrange the six-year oil swap described below: - $\quad$ Settlement is made monthly.
- The notional principal is for 500,000 barrels per month.
- The monthly WTI index value is determined as the average of the daily settlement prices for the crude oil futures contract traded on the New York Mercantile Exchange (NYMEX) .
- The swap dealer pays BGI $\$ 57.00$ per barrel.
- BGI pays the swap dealer the average NYMEX Oil futures price per barrel.
- $\quad$ PU pays the swap dealer $\$ 57.50$ per barrel.
- The swap dealer pays PU dealer the average NYMEX Oi futures price per barrel.
-Refer to Exhibit 14-7. Describe the transaction that occurs between PU and the swap dealer if the monthly average oil futures settlement price is $55.50.

• A) PU pays the swap dealer $850,000
• B) The swap dealer pays PU $1,000,000
• C) PU pays the swap dealer $1,000,000
• D) The swap dealer pays PU $850,000
• E) None of the above.

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Definitions:

Activity-Based Costing

A costing method that assigns overhead and indirect costs to related products and services based on the activities that generate the costs.

Direct Labor-Hours

It measures the total hours worked by employees directly involved in manufacturing a product.

Activity-Based Costing

A method of costing that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption.

Activity Rates

Predetermined rates used in activity-based costing to allocate costs to products or services based on specific activities undertaken.