Cameron Company sells 2,000 units of its product for $500 each in 2017. 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 $100 per unit. In 2017, warranty contracts are honoured on 40 units for a total cost of $4,000. What amount should Cameron Company accrue on December 31, 2017 for estimated warranty expense?

Question

Quizplus · Accepted Answer

Cameron Company expects 3% of 2,000 units (60 units) to be defective, with an average repair cost of $100 per unit. Therefore, the estimated warranty expense is 60 units * $100 = $6,000. Since $4,000 has already been incurred, the company should accrue the remaining $2,000.

Cameron Company Sells 2,000 Units of Its Product for $500