Shaw Company sells 2,000 units of its product for $500 each. 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 $50 per unit. In the year of sale, warranty contracts are honored on 40 units for a total cost of $2,000. What amount should Shaw Company accrue on December 31 for estimated warranty costs?

Question

Quizplus · Accepted Answer

Shaw Company expects 3% of 2,000 units (60 units) to be defective, with an average repair cost of $50 per unit, totaling $3,000. Since $2,000 has already been incurred, the company should accrue $1,000 more for estimated warranty costs.

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