Question

Warranty4U provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for three years. During the earnings

year, Warranty4U provided 42,000 such warranty contracts at an average price of $81 each. Related to these contracts, the company spent $400,000 servicing the contracts during the current year and expects to spend $2,100,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?
A) $734,000.
B) $300,667.
C) $3,002,000.
D) $902,000.

Answer 1

The net profit Warranty4U will recognize in the current year related to the warranty contracts is the total revenue of $3,402,000 less the current year expenses of $400,000, which equals $3,002,000.

Step-by-step explanation:

To determine the net profit that Warranty4U will recognize in the current year related to the warranty contracts, we need to calculate the earnings for the current year and account for the expenses incurred and projected.

The company sold 42,000 contracts at an average price of $81 each. The total revenue from these contracts is:

• 42,000 contracts x $81 per contract = $3,402,000

In the current year, the company spent $400,000 servicing contracts. In addition, Warranty4U expects to spend $2,100,000 in the future. Since it's an extended service contract over three years, we would typically recognize revenue over the contract period; however, the question asks for the current year only.

Thus, for the current year's net profit:

• Total Revenue - Current Year Expenses = $3,402,000 - $400,000 = $3,002,000

This gives us the net profit for the current year, relevant to the contracts. The correct answer is:

• C) $3,002,000