On March 1, 2011, Mattie Company Received an Order to Sell

question 19

Multiple Choice

On March 1, 2011, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2012. On March 1, 2011, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2012 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2011. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net impact on Mattie's 2012 income as a result of this fair value hedge of a firm commitment?

• A) $379,760.60 decrease.
• B) $8,360.60 increase.
• C) $8,360.60 decrease.
• D) $4,390.40 decrease.
• E) $379,760.60 increase.

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Definitions:

Target Return

A pricing strategy where the price is set based on a targeted return on investment for a product or project.

Bundle Pricing

A pricing strategy where multiple products or services are sold together at a single price, often at a discount compared to purchasing each item separately.

Standard Markup

The typical percentage added to the cost price of goods to determine the selling price.

Penetration

The process of entering or making an entrance into a market with the aim to establish a significant foothold or presence.