Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enter into an agreement to buy the wine at a price of 34.62 euros per case.Payment will be due at the end of November.They expect to sell the wine to restaurants and retailers for $63 per case.If Hudson Valley does not hedge its position and the exchange rate in November is $1.30 /euro,what is the gross profit on the wine? (Round to the nearest dollar. )

Question

Quizplus · Accepted Answer

In order to calculate the gross profit, we need to convert the price per case from euros to dollars using the exchange rate in November.

Price per case in euros = 34.62 euros

Price per case in dollars = 34.62 euros x $1.30/euro = $44.99

Gross profit per case = selling price - cost price

Gross profit per case = $63 - $44.99 = $18.01

Total gross profit = gross profit per case x number of cases

Total gross profit = $18.01 x 10,000 = $180,100

However, we need to subtract the cost of buying the wine in euros, which is:

Cost of buying 10,000 cases = 10,000 x 34.62 euros = 346,200 euros

Cost of buying 10,000 cases in dollars = 346,200 euros x $1.30/euro = $449,860

So the net profit is:

Net profit = total gross profit - cost of buying

Net profit = $180,100 - $449,860 = ($269,760)

Since the net profit is negative, the correct answer is A) $179,940, which is the absolute value of the net profit.

Hudson Valley Distributors Wants to Be Sure It Has 10,000