Marin Company sells 9,000 units of its product in 2018 for $500 each. The selling price includes a one-year warranty on parts. It is expected that 3% of the units will be defective and that repair costs will average $50 per unit. In the year of sale, warranty contracts are honored on 180 units for a total cost of $9,000. What amount should Marin Company report as Warranty Expense in its 2018 income statement?

Question

Quizplus · Accepted Answer

The expected number of defective units is 3% of 9,000, which is 270 units. The total cost of repairs for these units is expected to be 270 x $50 = $13,500. Since Marin Company honored warranty contracts on 180 units, the remaining warranty expense to be recognized is $13,500 - $9,000 = $4,500. Therefore, the amount that Marin Company should report as Warranty Expense in its 2018 income statement is $4,500.

Marin Company Sells 9,000 Units of Its Product in 2018