On February 1,2015,Hills Company had 10,000 pounds of inventory costing $1.50 per pound;the market value per pound was $1.95 on this date.Hills entered into a futures contract to sell the 10,000 pounds of inventory during May 2015 at $2.25 per pound.Which of the following statements does not accurately describe the impact of this futures contract?
A)Hills has foregone the benefit of additional profits (the upside potential)if the price per pound exceeds $2.25 during the month of May.
B)Hills has eliminated the risk of reduced profits (the downside potential)if the price per pound is less than $2.25 during the month of May.
C)Hills' gross profit in May will be $3,000 regardless of the actual price per pound in May.
D)The value of the futures contract decreases as the market price per pound of inventory increases.

Question

Quizplus · Accepted Answer

The statement "Hills' gross profit in May will be $3,000 regardless of the actual price per pound in May" is not accurate. The gross profit in May will depend on the actual price per pound in May, minus the cost of the inventory and any expenses related to the futures contract. The $3,000 represents the difference between the contracted price of $2.25 per pound and the cost of $1.50 per pound, multiplied by the 10,000 pounds of inventory.

On February 1,2015,Hills Company Had 10,000 Pounds of Inventory Costing