Heinz uses 1000 tons of corn syrup each year as an ingredient in its tomato ketchup...

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Heinz uses 1000 tons of corn syrup each year as an ingredient in its tomato ketchup...

Heinz uses 1000 tons of corn syrup each year as an ingredient in its tomato ketchup products. Heinz is concerned about the increase in prices of

cornminus−based

products and purchases a

fixedminus−price

contract to buy corn syrup at $20,000 per ton. What is the impact on earnings before taxes as opposed to no hedging if the price of corn is $25,000 per ton over the next year?

B.+$5 million

C.−$5million

D.+$5,000

business finance

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Answer 1

Answer #1

Due to the fixed price contract, Heinz will be able to procure corn syrup at the price of $20,000 as opposed to $25,000 per tonne.

So, net savings per tonne = $5,000

For 1000 tonnes, the positive impact on earnings before tax will be = 5000 * 1000 = $5,000,000 or $5 Million

Or the EBIT will be higher by $5 Million.

Final answer: B. +$5 Million

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Answer 2

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