E 12-5 Call option Star Ltd. is a furniture manufacturer. Star purchases a call option with a price of $20,000 to prevent the fluctuation of lumber prices. The call option gives Star Ltd. the right to purchase 1,000 pounds of lumber at a price of $100 per pound.

Other costs to process the 1,000 pounds of lumber into furniture equal $10,000. Star can sell all the furniture at a total price of $150,000.

REQuIRED: Calculate the economic income of Star Ltd. if the price of lumber is:

1. $120 per pound 2. $100 per pound 3. $80 per pound 436 CHAPTER 12