Exhibit 13-1 The Jung Company includes a premium in each box of its cereal.For four premiums plus $2.00, customers are entitled to a plastic doll that costs Jung $4.50 each.Jung expects 60% of the premiums to be redeemed.In 2010, Jung sold 500, 000 boxes of cereal and distributed 25, 000 dolls.
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Refer to Exhibit 13-1.What is Jung's premium expense for 2010?
A)$125, 000
B)$187, 500
C)$225, 000
D)$337, 500

Question

Quizplus · Accepted Answer

The premium expense for Jung in 2010 is calculated by considering the cost of each doll ($4.50) and the expected redemption rate (60%). Since 500,000 boxes were sold, and each box contains a premium, the total number of premiums distributed is 500,000. With a 60% redemption rate, the expected number of redeemed premiums is 60% of 500,000, which is 300,000 premiums. Since it takes four premiums to redeem one doll, the expected number of dolls to be redeemed is 300,000 premiums / 4 = 75,000 dolls. The cost to Jung for these dolls is 75,000 dolls * $4.50 per doll = $337,500. However, the actual number of dolls distributed was 25,000, not the expected 75,000. This discrepancy suggests a mistake in the calculation based on the expected redemption rate and actual distribution. The correct calculation should focus on the actual expense incurred from distributing 25,000 dolls at the cost of $4.50 each, which is 25,000 * $4.50 = $112,500. This amount does not match any of the provided options directly, indicating a need to reassess the calculation or the interpretation of the question based on the provided information. Given the options and the scenario, the closest match or intended calculation might involve a different approach or consideration not directly outlined in the explanation, such as accounting for the $2.00 customers pay, which was not factored into the initial explanation. However, without incorporating the customer payment into the cost calculation directly, the explanation provided does not accurately resolve to one of the given choices, suggesting a misunderstanding in the application of the redemption rate or the cost per doll in calculating the total premium expense.

Exhibit 13-1 the Jung Company Includes a Premium in Each