Question

Entity W sells 50 pairs of shoes on 1 February 20×5 for $70 a pair.

The contract with customers allows the shoes to be returned for a full refund if returned within 30 days.
Past experience indicates that there is a 60% chance that 2 pairs would be returned, 30% chance that no pairs would be returned and 10% chance that 5 pairs would be returned.
What is the revenue that should be recognised on 1 February 20×5 if the most likely method is used?
A. $2,016
B. $3,360
C. $3,381
D. $3,455

Answer 1

The revenue that should be recognized on 1 February 20x5 is $3,416.

Step-by-step explanation:

To calculate the revenue that should be recognized on 1 February 20x5, we need to determine the expected number of pairs of shoes that would be returned and subtract this from the total number of pairs sold.

Expected number of pairs returned = 2 pairs x 0.6 + 0 pairs x 0.3 + 5 pairs x 0.1 = 1.2 pairs

Revenue recognized = Total pairs sold - Expected pairs returned = 50 pairs - 1.2 pairs = 48.8 pairs

Revenue recognized = 48.8 pairs x $70/pair = $3,416