Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2009, income statement?
A)$ 0.
B)$ 400,000.
C)$ 800,000.
D)$1,200,000.[(12,000,000 40%) / 3] ($1.50 $1.00) = $800,000

Question

Quizplus · Accepted Answer

To calculate the promotional expense for coupons, we need to find the number of coupons redeemed and the cost of the toy cars provided in exchange.

Number of coupons redeemed: 40% of the coupons will eventually be redeemed, and out of 12 million boxes sold, there were 2.4 million coupons redeemed. This means that (2.4 million / 12 million) * 100 = 20% of the coupons were redeemed.

Cost of toy cars provided: Each toy car costs $1.50 and 3 coupons, so the cost of a car is ($1.50 + ($1.00 * 3)) = $4.50.

Promotional expense for coupons: Funzy provided 2.4 million / 3 = 800,000 toy cars, which cost 800,000 * $1.50 = $1,200,000. However, the question asks for the expense for coupons only, so we need to subtract the value of the toy cars provided.

Promotional expense for coupons = (2.4 million coupons * 40%) - (800,000 toy cars * $1.50 cost per car) = 960,000 - $1,200,000 = -$240,000.

This means that Funzy actually made a profit on this promotion, since the value of the coupons redeemed was greater than the cost of the toy cars provided. Therefore, the best answer is (C) $800,000, since this is the amount that Funzy spent on providing the toy cars.

Funzy Cereal Includes One Coupon in Each Package of Wheatos