Jamison Company uses IFRS for its financial reporting. It produces machines that sell globally. All sales are accompanied by a one-year warranty. At the end of the year, the company has the following data:
-2,500 units were sold during the year.
-The trend over the past five years has been that 4% of the machines were defective in some way and had to be repaired. Of this 4%, half required a full replacement at a cost of £3,000 per unit and half were able to be repaired at an average cost of £300.
What is the expected value of the warranty cost provision?

Question

Quizplus · Accepted Answer

The expected value of the warranty cost provision is calculated by considering the probability and cost of each outcome. 4% of 2,500 units is 100 units. Half of these (50 units) require full replacement at £3,000 each, totaling £150,000. The other half (50 units) require repair at £300 each, totaling £15,000. Therefore, the total expected warranty cost is £150,000 + £15,000 = £165,000.

Jamison Company Uses IFRS for Its Financial Reporting