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:$\bullet$3,000 units were sold during the year.$\bullet$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?
A) $360,000
B) $198,000
C) $396,000
D) $180,000

Question

Quizplus · Accepted Answer

The expected value of the warranty cost provision is the sum of the expected costs of each type of repair. The expected cost of a full replacement is $3,000 * 0.04 * 0.5 = $600. The expected cost of a repair is $300 * 0.04 * 0.5 = $60. The total expected cost is $600 + $60 = $660 per unit. The total expected cost for 3,000 units is $660 * 3,000 = $198,000.

Jamison Company Uses IFRS for Its Financial Reporting ∙\bullet∙ 3,000 Units Were Sold During the Year

Jamison Company Uses IFRS for Its Financial Reporting $\bullet$ 3,000 Units Were Sold During the Year