Dunn Barrels, Inc. (DBI) manufactures oak barrels for the wine industry at its f

Question

Dunn Barrels, Inc. (DBI) manufactures oak barrels for the wine industry at its facility in the United States. One of the raw materials used for some of its barrels is French oak lumber. The company fabricates the oak lumber into the appropriate-sized staves and assembles these staves, along with other components, into barrels. In July 2014, the company signed a contract to buy oak lumber from a French supplier for the coming two years. The contract calls for DBI to pay the supplier in euros (€), although all other costs that DBI incurs are paid for in dollars. A summary of the production cost for one barrel, based on the expected production level, follows:

* Based on the exchange rate at the time the contract with the French supplier was signed. The cost of lumber in euros was €77.50 as of July 2014.

The exchange rate between the dollar and the euro was $1.36 = €1.00 in July 2014 when the contract was signed. By July 2015, the exchange rate had changed to $1.10 = €1.00.

Required

b. What effect, if any, would the change in the exchange rate have on DBI’s variable cost per unit for July 2014 versus July 2015?

Variable costs: French oak $ 100 * All other variable costs 150 Fixed costs 50

Explanation / Answer

b.Because the US Dollar lost value relative to the Euro from July 2014 to July 2015 the cost of the wood needed to make one barrel increased thus increasing the variable cost per barrel.

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