LeMay Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from LeMay Frosted Flakes boxes and $1.00.The company estimates that 60% of the boxtops will be redeemed.In 2010, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls.If the bowls cost LeMay Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2010?

Question

Quizplus · Accepted Answer

The company expects 60% of 500,000 boxtops to be redeemed, which is 300,000 boxtops. Since 220,000 boxtops have already been redeemed, 80,000 boxtops are still expected to be redeemed. This means 20,000 more bowls (80,000 boxtops / 4 boxtops per bowl) will be needed. The cost of these bowls is 20,000 bowls * $2.50 = $50,000. However, customers pay $1.00 per bowl, so the net cost is $1.50 per bowl. Therefore, the liability is 20,000 bowls * $1.50 = $30,000.

LeMay Frosted Flakes Company Offers Its Customers a Pottery Cereal