Shear Company sells computer equipment with a 2-year warranty. Prior experience indicates that costs associated with this warranty average 1% in the first year and 2% in the second year. In 2012, Shear had sales of $1,800,000. It paid $250,000 for materials and labour to make warranty-related repairs in 2012. What amount should the warranty expense for 2012 be?
A)$18,000
B)$36,000
C)$54,000
D)$250,000

Question

Quizplus · Accepted Answer

To calculate the warranty expense for 2012, we need to estimate the total warranty costs for the year. Based on prior experience, we know that the warranty costs average 1% in the first year and 2% in the second year. Since Shear sells equipment with a 2-year warranty, we can estimate the total warranty costs for the year as follows:

Total warranty costs = Sales x (1% + 2%) = $1,800,000 x (0.01 + 0.02) = $54,000

Therefore, the warranty expense for 2012 should be $54,000, which is the estimated total warranty costs for the year minus the actual amount paid for warranty-related repairs ($250,000).

Shear Company Sells Computer Equipment with a 2-Year Warranty