Question

Safari Co. was organized to sell a single product that carries a 45-day warranty against defects. Engine 7% of the units sold will prove defective and require an average repair cost of $70 per unit. During Safari's first month of operations, total sales were 1,200 units; by the end of the month, six defective units had been repaired. ering estimates indicate that he liability for product warranties at month-end should be OA. $5,460. B. $6,300. O C. $420. O D. $5,880

Answer 1

A. $5,460

Step-by-step explanation:

Expected rate of defects = 7%

Average repair cost = $70

Total sales = 1,200 units

Actual defective units = 6

Liability for product warranties (L) at month-end should be the difference between the expected warranty costs (EW) and the actual warranty (AW) costs:

`EW = 0.07*1,200*\$70 = \$5880\\AW = 6*\$70 =\$420\\L = \$5880 - \$420\\L= \$5460`

Liability for product warranties at month-end should be $5,460.