Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Customers who took advantage of the offer prepurchased 400,000 gallons of oil at $3.00 per gallon.Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon.If the November spot price is $2.25 per gallon,Swenson's gross profit on the heating oil sold in June will be

Question

Quizplus · Accepted Answer

Swenson has already contracted to buy 400,000 gallons of oil for November delivery at a price of $2.50 per gallon, so their cost is fixed. If the spot price in November is $2.25 per gallon, Swenson will make a gross profit of $0.25 per gallon, or $100,000 for the 400,000 gallons sold in June (since they prepurchased at $3.00 per gallon). Therefore, the answer is C, $200,000 gross profit.

Swenson Oil & Gas Allows Its Customers to Prepurchase Heating