Warranty4U provides extended service contracts on electronic equipment sold through major retailers.The standard contract is for three years.During the current year, Warranty4U provided 21,000 such warranty contracts at an average price of $81 each.Related to these contracts, the company spent $200,000 servicing the contracts during the current year and expects to spend $1,050,000 more in the future.What is the net profit that the company will recognize in the current year related to these contracts?

Question

Quizplus · Accepted Answer

To find the net profit, we need to calculate the revenue and expenses related to the warranty contracts.

Revenue: 
21,000 contracts x $81 per contract = $1,701,000

Expenses: 
Servicing expenses during the current year = $200,000 
Expected servicing expenses in the future = $1,050,000

Total Expenses = $200,000 + $1,050,000 = $1,250,000

Net Profit = Revenue - Total Expenses 
Net Profit = $1,701,000 - $1,250,000 = $451,000

Therefore, the net profit that the company will recognize in the current year related to these contracts is $451,000. Option D is correct.

Warranty4U Provides Extended Service Contracts on Electronic Equipment Sold Through