Identify whether each of the following transactions involves spot exchange, cont
ID: 1193752 • Letter: I
Question
Identify whether each of the following transactions involves spot exchange, contract, or vertical integration.
a.Barnacle, Inc., has a legal obligation to purchase 2 tons of structural steel per week to manufacture conveyor frames.
b.Exxon-Mobil uses the oil extracted from its wells to produce raw polypropylene, a type of plastic.
c.Boat Lifts R Us purchases generic AC motors from a local distributor.
d.Kaspar Construction—a home-building contractor—purchases 50 pounds of nails from the local Home Depot.
Explanation / Answer
Answer a:
Contract is an agreement between two parties to carry out some legal obligation. Both party will receive something and in lieu of that will pay something.
In point (a) of the problem, Barnacle has a legal obligation to buy 2 tons of structural steel per week. The party from whom he will buy is second party of the contract. Barnacle will pay him the cash. In lieu of that second party will deliver structural steels as per terms and conditions stated in the contract. So it is a contract.
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Answer (b):
Vertical integration ocuurs when a firm manufactures something which is manufactured by using its main trading product. Here Exxon Mobil is a petrolium refinig company. It extracts crude petrol from its well. Then through refining process decompose it into petrol, diesel, mobile, parafin, naptha etc. Manufacturer of polyproplene uses oil as a basic raw material. So it is a product manufactured in vertical phase of the production chain. Thus when Exxon moile is manufacturing polyproplene, it becomes a vertical integration.
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Answer c:
Spot exchange occurs when a party goes to the market and buys its requirement from the market through spot payment. Here Boat Lifts R Us has purchased a generic ACmotor from local distributer. For this it has to pay price to the distributor immediately in cash. So it is an example of spot exchange.
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Answer d:
It is also an example of spot exchange. Here Kaspar construction has purchased 50 pounds of nails from local Home Depot.It has to purchase them at prevailing rate. Money is to be paid on puchase. Hence it is also a spot exchange.
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