Modem Appliances, Inc. sells food processors for $150 with a 120-day warranty against defects. Past experience indicates that 5% of the processors will have some defect during the warranty period and that the necessary repairs and adjustments will cost $25 per defective unit. Sales for August are $225,000.
What is the estimated liability for product warranties for units sold in August?

Question

Quizplus · Accepted Answer

The estimated liability for product warranties for units sold in August is calculated by first determining the number of units sold, which is $225,000 / $150 = 1,500 units. Given that 5% of these are expected to be defective, the number of defective units is 1,500 * 5% = 75 units. The cost to repair each defective unit is $25, so the total estimated liability is 75 * $25 = $1,875.