according to the Practice Problems for Reading 24 (Book 2 page 313) Problem No. 2, the answer is C.
"Given Ruiz’s believe about the direction of exchange rates ( foreign currency is depreciating), Eurexim’s (parent company) gross proft margin would be HIGHEST if it accounts for the subsidiary’s inventory using:
a) FIFO & Temporal Method
b) wheighted av. cost and Temporal Method
c) FIFO and Current Rate Method
The way I thought of this problem:
foreign currency is depreciating so FIFO COGS is lower using historical cost (TEMP METHOD) than average cost (CURRENT METHOD)
gross profit margin = (Revenue - COGS) / Revenue
TEMP Method: (Average Rate - Historical Rate) / Average Rate
CURRENT Method: (AV Rate - AV Rate) / AV Rate
Since Historical Rate < Average Rate, the gross profit margin should be higher using the Temp Method!
However CFAI states: “For either inventory choice, the CURRENT RATE METHOD will give higher gross profit to the parent company if the subsidiary’s currency is depreciating -> Thus using FIFO, CURRENT RATE METHOD will generate a higher gross profit for the parent company”
What am I missing out here? I don’t get it?
Thanks for your help in advance!